How to File Taxes for First-Time Homeowners

Becoming a first-time homeowner is a significant deal for everyone. Having your own home comes with a responsibility to look after your investment. This April, you’ll need to complete taxes as a homeowner for anyone who bought a home for the first time last year. A significant benefit of becoming a homeowner as you’ll now be able to take advantage of several tax breaks. Unfortunately, many homeowners miss out on many of these every year, so it pays to know your situation and what you qualify for.

The sooner you start dealing with this, the better. So, to prepare you, we’ve outlined everything you need to know about filing taxes as a first-time homeowner.

What is a Tax Deduction When Filing Taxes?

Tax deductions allow you to reduce your taxable income with the IRS. This lowers the amount you can be taxed on, thus saving you money. There are two options for taking tax deductions, itemized deductions or standard deductions. The latter comes with less paperwork and is the simplest to take. However, it usually results in having to pay more in taxes. Itemized deductions are a little trickier but may result in more savings. Before taking any itemized deductions, you would be advised to consult a tax accountant to ensure you qualify and file correctly.

You Can Deduct Mortgage Interest and PMI

Your deduction on mortgage interest is one of the most valuable tax breaks you can take advantage of. Previously, you could deduct the interest paid on up to $1 million in mortgage debt ($500,000 if married and filing separately). However, since the Tax Cuts and Jobs Act of 2017 (TCJA), the amount you can deduct has been reduced. If you bought a home on or before December 15, 2017, you are still covered by this limit. But if not, then the new limit is $750,000 ($375,000 if married and filing separately). You can take out this deduction every year you’re paying a mortgage.

You probably have private mortgage insurance (PMI) for those who took out a home loan with a down payment of less than 20%; you probably have private mortgage insurance (PMI). This can also be deducted if your gross income is less than $100,000 if married or $50,000 if single.

You can Deduct State and Local Taxes.

State and local taxes (SALT) can be deducted from your federal taxes for up to $10,000 as set by the TCJA. This limit includes property taxes withheld from your paycheck or made through estimated payments. Anyone paying their taxes through an escrow account will see the amount you’re paying on your Form 1098. Those who pay their taxes directly to their municipality should record these payments so they can deduct them.

You must itemize one crucial point to deduct from your SALT, mortgage interest, and PMI payments. This is likely beneficial if you live in an expensive, high-tax area (like NYC).

Do You Qualify for Any Property Tax Exemptions?

Many states allow homeowners to qualify for property tax exemptions if they meet the requirements. Most of these are decided on the local level, so you’ll have to check with an assessor to determine the available exemptions. NYS’s most common tax exemptions include senior citizens, veterans, persons with disabilities, and agricultural properties.

There’s a Limited Deduction for Home Equity Loans

If you’ve taken out a home equity loan in the past year, you may be able to deduct some of this. However, there are some significant restrictions on this. Previously, you could deduct the interest on home equity loans of up to $100,000, regardless of your money. You can only deduct this interest if the money was solely used for home improvements. You can make up this deduction to $750,000 of qualified residence loans, including your mortgage and home equity loan.

The home improvements must have raised your home’s appraisal value to qualify. The easiest way to prove this is by having an appraisal done before the upgrades were done and then getting another done once they’re complete. Simple maintenance or painting a room won’t qualify for this.

Home Office Deduction for Self-Employed Only

Another change the TCJA brought was eliminating the deduction for reimbursed home office expenses. This is no longer available for employees who work from home for an employer. However, it is still available for the self-employed or has any freelance income. So long as you have a part of your home exclusively used for business. To be eligible for this, you only have to do freelance work as a side hustle, and it needn’t be full-time.

You can take this deduction based on your actual expenses or a simplified deduction. If you choose to deduct based on your actual costs, you can deduct a portion of your rent, mortgage interest, homeowner’s insurance, and utilities based on the percentage of your home used as an office. For instance, if your home office takes up 1/10^th of the total square footage of your home, then you can deduct 10% from those expenses.

The process is more straightforward for those who choose to take a simplified deduction but may come with a lower deduction. This works by deducting $5 per square foot of office space up to 300 square feet or $1,500. Before filing your taxes, you should check with a tax professional to see if you meet the strict requirements to take this deduction. You should also consult IRS Publication 587.

Final Thoughts on Filing Taxes

While we’ve tried our best to lay out all the deductions that a new homeowner should know, everyone’s situation will differ. Tax laws change all the time, and what was deductible one year may not be in the following year. However, you’ll accept one part of the responsibility when you become a homeowner, understanding how the IRS taxes you. If this is your first time filing as a homeowner, we recommend you consult a tax attorney, financial advisor, or other qualified professional. This costs money, but that’ll come back to you through your federal tax return or savings on your tax bill.