Property Tax Deduction Tips for New Homeowners

Moshe Farber
10, Apr 2022

Tax season is overwhelming for just about everyone, and many homeowners struggle to figure out what sorts of tax deductions and credits they can take advantage of. If you are a new homeowner, you might not have considered how your tax situation has changed so it’s essential to do your homework and determine how you can minimize your tax burden without running afoul of the IRS.

Once you learn the basic financial steps you should take during tax season, you’ll likely save thousands of dollars over the many years of owning your home. Let’s explore some of the most common property deductions to keep in mind when preparing your taxes.

Deducting your Mortgage Interest 

The first thing you should consider when filing taxes as a new homeowner is that you are likely able to deduct the mortgage interest you’ve paid throughout the year to reduce your tax burden. Specifically, you’re able to deduct your mortgage interest payments on debt up to $750,000. If you took out your home loan prior to December 16, 2017, you’ll be able to deduct interest on loans up to $1 million.

In order to deduct your mortgage interest, you should receive a document sent by your lender called Form 1098. Form 1098 is specifically used to report contributions and other tax-deductible expenses to taxpayers and the IRS. Also known as the Mortgage Interest Statement, the IRS requires lending institutions to send a Form 1098 to taxpayers before February 1 of each year so that it can be used by homebuyers to file their taxes.

Keep in mind that lenders will not be required to file or send Form 1098 if the mortgage does not meet the $600 interest threshold, although some lends will file it anyway. Be careful not to confuse Form 1098 with some of its variants such as Form 1098-C (related to boats and planes), Form 1098-T (related to tuition payments), or Form 1098-E (related to student loan interest.) Form 1098 will include your taxpayer and personal information, the amount of mortgage interest received, the outstanding principal balance of your mortgage, and the number of properties securing the mortgage. 

Identify the amount of interest you’ve paid since the purchase of the home to find the deduction you can claim when filing your taxes. This figure should be included in your Form 1098 but even if it isn’t you can still claim this deduction. When considering whether it makes sense to make use of the mortgage-interest deduction you should speak with your tax advisor about relevant changes to the tax law.

Deducting your Local Property Taxes

You can claim the local taxes you pay on your home as a deduction when filing taxes. The amount you have paid in property taxes should be shown by documentation sent from your lender if you pay them via an escrow account. 

However, if you pay property taxes directly to your local government or municipality, you will have to calculate the tax you’ve paid by looking at your financial records. This is why every homeowner should keep careful documentation on the local taxes that they pay. 

You should also keep in mind that you likely reimbursed the individual that sold you your home for property taxes that they had already prepaid. If they have, this will be shown on your settlement sheet. You can include these payments you’ve made in your tax deduction. 

The total amount of state and local tax is $10,000 per tax year. Also, bear in mind that in order to deduct real estate taxes, you’ll have to itemize and claim the deduction on a Schedule A. Transfer tax you have paid after buying or selling real estate can not be claimed as a deduction.

Mortgage Points

Another deduction you should be aware of is one that refers to mortgage points. You might recall that when buying your house you paid for mortgage points as part of your closing costs. Each point represents one percent of the total cost of your home, and paying points when closing on your home can lower your interest rates. 

Importantly, discount points do represent a form of prepaid interest, and, as a result, are tax-deductible. To see how many discount points you paid for when buying your home, review the Form 1098, sent by your lender. This form will display the mortgage points you’ve paid for, which you can then claim as an itemized deduction on your Schedule A.

Home Improvements and Record-Keeping

Unfortunately, you can not deduct the home improvement expenses you incur from making modifications to your home. 

However, you should absolutely keep records of home improvement expenses because if or when you sell your home, you can reduce any tax burden you might face from the profit you earn from the sale. 

Today, in many cases home sales profits are tax-free, but it is possible for the IRS to demand a partition of those profits. Keeping records of home improvement expenses will help you to reduce any tax burden you might face when selling your home.

All of this said, if you have had energy-saving home improvements done to your home, you might be able to claim a tax credit of up to $500 when filing your return. 10% of the cost of any energy-saving device including energy-efficient air conditioners, skylights, windows, outside doors, insulation systems, and roofs can be deducted. 

There is an additional 36% credit available to homeowners that make use of more sophisticated energy-saving tech including certain solar-powered generators and water heaters. What’s more, there is no cap to the dollar amount of this credit.

Home Office Expenses

Many self-employed homeowners have a dedicated home office in their residence. If your home office meets certain specifications, you’re able to include it as one of your deductions. 

Your home office must be regularly and exclusively used for business, and it must be the primary site of your business. Unfortunately, if you are a remote worker employed by a corporation, you probably won’t qualify for a home office deduction. 

When claiming a home office deduction, you have two options at your disposal. As long as you are filing for tax years after 2013, you can use the IRS’s simplified home office deduction. This new option was introduced because the original method required detailed record-keeping, calculation, and substantiation. 

The new option streamlines the process by allowing taxpayers to multiply a specific rate by the square footage of their home office to determine the amount of the deduction. Proponents of this simplified option also contend that taxpayers that are claiming a home office deduction are less likely to trigger an audit when using it. 

If you choose to use the regular method to claim the deduction, you will have to calculate the expenses of your home office by looking at your mortgage payment and the percentage of your home used exclusively for business. 

Taken all together, it’s impossible to deny that tax season is often a stressful time for new homeowners, but learning the fundamental deductions and credits available to you will take a weight off your shoulders. At the end of the day, you may well find that owning a home allows you to take advantage of tax deductions you may never have heard of or utilized before.  

Want a mortgage that will help you save thousands of dollars in property taxes? Reach out to an Astar loan officer today! Email or call 888-ASTAR-11 (888-278-2711) to start the loan application process.

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