Federal income tax significant events, Part 7 – Purchasing a Home

This article is the seventh entry in a series of various life events that impact your annual federal income tax return filed with the Internal Revenue Service (IRS).  This article covers the purchase of a home.  Further reading about this area is available in the IRS’s publication for homeowners.

When it comes to the purchase of a home, there are a variety of expenses you would not otherwise pay in life, some of which you can deduct—and others which you cannot deduct—from your federal income tax.

First, you can deduct the following home-related purchase expenses:

Real estate tax.  Most jurisdictions charge various local and state taxes based on the value of your home.  These taxes are known as real estate tax.  In general, all real estate taxes you pay are deductible in the year you pay them.

Sales tax.  Sales tax on the purchase of your home or building materials in certain circumstances can be deducted from your federal income tax.

Mortgage interest.  If you take out a loan in order to purchase a home, the interest you pay as a part of that loan is deductible.  Such loans include first or second loans, home equity loans, and home improvement loans.  So long as such loans are related to your primary residence or a second home, the interest on these loans is deductible.

Closely related to mortgage interest are points.  Points are generally fees charged to reduce the interest rate you are charged on a loan.  Points are considered a pre-payment of mortgage interest.  Therefore, they are only partially deductible in the year you take out the home loan, with the remainder of the deduction spread across future years.

Mortgage insurance premium.  Certain insurance premiums you pay related to a home with a mortgage are deductible.

To deduct any of the items listed above, you must choose to itemize your deductions on your federal income tax return.  This means that you will not receive your standard deduction.  Therefore, you should work with a tax attorney to determine whether your standard deduction or your itemized deductions provide you a better benefit from a tax perspective.

The following home-related expenses are not deductible on your federal income tax return:

  • Amounts you pay for help in or around your home, including but not limited to payments made to gardeners or other landscapers, repairmen, and maids
  • Depreciation on your home or the contents of your home
  • Amounts you pay for utilities, including but not limited to water, gas, electricity, television, telephone, and Internet service
  • The majority of settlements costs—that is, the various fees you pay when you close on your home
  • Earnest money or other money you lose to secure a home when you then choose not to buy that home
  • Insurance premiums other than those for a home mortgage

If you have purchased a home or you are considering purchasing a home and you have questions about how this event will impact your federal income tax return, you can work with a tax attorney to understand the implications and to be sure your return is filed correctly to provide you the greatest benefit.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.