How Does Buying a House Affect Taxes? Let’s Dive In

Featured Image by Unplash

If you are thinking of becoming a homeowner, you’ll be pleased to hear there are a range of tax benefits you could qualify for. Buying a house is a substantial investment and to offset some of the costs, the IRS offers a number of tax breaks. In this article, we will explore some of the most common homeowner tax breaks that are available.

Tax Deductions

You can benefit from the following available tax deductions which will help to lower your tax bill:

  • Mortgage Interest: You can deduct the interest paid on your mortgage loan up to $750,000 or $375,000 if you are married and filing separately. The limit is $1 million for homes purchased before December 16, 2017, or $500,000 if you are married and filing separately.
  • Mortgage Points: If you paid part of your mortgage in advance, you may be able to lower your monthly mortgage payment based on the amount of interest you paid upfront. This is known as ‘mortgage points’ where one point is generally equivalent to 1% of your loan and will reduce your interest rate by about 0.25%. 

For example, one point on a $400,000 loan is worth $4,000 and would reduce a 4% interest rate down to 3.75%. Providing certain criteria are met, the pre-paid interest is also tax deductible.

  • Real Estate Taxes: The state and local tax (SALT) deduction allows you to deduct certain real estate taxes up to a combined value of $10,000 per year, or $5,000 if you are married and filing separately. 
  • Home Office: If you are a self-employed, small business owner who regularly uses part of their home exclusively for business purposes you may be entitled to a tax deduction. The deduction is based on the size of your home office and calculated according to square footage. 

Currently, you can deduct $5 per square foot, up to a maximum of 300 square feet. For example, if your home office measures 200 square feet, you are eligible for a tax deduction of $1,000 (200 x $5). specializes in creative financing techniques which can help you purchase your new home.

Home Sale Exemption

When it comes to selling your house in the future, hopefully, you will realize a healthy gain. Thanks to this exemption, depending on the size of your profit you may not have to pay any capital gains tax.

The IRS offers a tax exemption of up to $500,000 for married couples who file jointly or $250,000 if you are single, on the sale of your primary residence. For example, if you buy a marital home for $400,000 today and sell it in 2025 for $900,000 you can deduct all of the $500,000 worth of capital gain if you file jointly with your spouse.

The exemption is only allowed once every two years and to be eligible you and your spouse need to have owned and occupied your home for at least two of the last five years. 

With the guidance in this article, you are now more informed about some of the tax benefits available to you when buying a house.