Benefits For First-Time Homebuyers
First times can be thrilling and terrifying all at once. Your first time home alone, your first time driving alone, your first day of college or a new job. Your first time buying a home is definitely no exception. You’ll finally have your own place with your own rules. To sort through that pile of paperwork and make sure you’re saving as much money as possible, here are five benefits for new homeowners.
1. You can deduct the interest you pay on your mortgage
The home mortgage interest deduction is probably the best-known tax benefit for homeowners. It lets you deduct all the interest you pay toward your home mortgage with a few exceptions, including these big ones:
- Your mortgage can’t be more than $1 million.
- Your mortgage must be secured by your home (unsecured loans don’t count).
- Your mortgage must be on a qualified home, meaning your main or second home.
2. You may be able to deduct points
Points are essentially prepaid interest that you offer upfront at closing to improve the rate on your mortgage. The more points you pay, the better deal you get.
You can deduct points in the year you pay them if you meet certain criteria. Included in the list (and it’s a long one): Points must be paid on a loan secured by your main home, and that loan must be to purchase or build your main home.
Pro tip: Points that you pay must also be within the range of what’s expected where you live — unusual transactions may cause you to lose the deduction.
3. For 2015, you can deduct PMI
Private mortgage insurance, or PMI, protects the bank in the event you default. PMI may be required as a condition of a mortgage for first-time homebuyers, especially if they can’t afford a large down payment.
For most years, PMI is not generally deductible. However, for 2015, qualifying homeowners who itemize may claim a tax deduction for the cost of PMI for both their primary home and any vacation homes.
4. Real estate taxes are deductible
Real estate taxes are imposed by state or local governments on the value of your property. Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account. If you don’t escrow for real estate taxes, you’ll deduct what you pay out of pocket directly to the tax authority.
And don’t forget about those taxes you paid at settlement. If you reimburse the seller for taxes already paid for the year, you get to deduct those too.
5. You’ll get capital gains tax relief down the road
I know you just bought your home, but admit it: Resale value is something you considered when you chose your home. And different from other investments for which you’re taxed on the full value of any gain, you can exclude some of the gain attributable to your home when you sell.
Under current law, you can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years (those years of owning and inhabiting don’t have to be consecutive).
Gain over that amount is taxed at capital gains rates, which are generally more favorable than ordinary income tax rates.