The Benefits of Tax Planning when Buying a New Home 

tax planning for new home
September 21, 2023

The importance of tax planning trickles into all of life’s major events, and that certainly includes buying a new home. Often, new homeowners are drowned with other concerns during the home buying process. Therefore, tax planning and compliance can slip off the radar when it comes to a home purchase.  However, there are many benefits to purchasing a home, especially when solid financial planning tax strategies are in place. 

The experts at Waters Hardy can help you navigate these potential benefits, whether it’s your first house or your next investment property. Additionally, our tax experts can provide guidance on how a home purchase can put money back into your pocket when it’s time to file your annual taxes. 

In the meantime, new homeowners should consider taking advantage of the credits and deductions that accompany a home purchase. It can also provide financial benefits years down the road.   

The Tax Benefits of Homeownership 

Many new homeowners who enlist the expertise of a tax planning and compliance partner are surprised to discover the positive impact that a home purchase has on their annual taxes. Let’s learn more about a sample of the credits and deductions available to homeowners when it comes to federal taxes.  

1. Mortgage Interest 

The interest you pay monthly on your mortgage can be an itemized deduction on your annual tax return. Home mortgage interest is deductible on the first $750,000 of mortgage debt, and your lender will provide you with the appropriate IRS Form 1098.This outlines the amount of interest that you paid in the previous year. 

Note that you may have paid extra interest at the time of your closing, which should also be accounted for, as well as any mortgage points, which are also deductible on your tax return.  

Mortgage points can be purchased to reduce your annual interest rate, and each point costs around 1% of the total loan and reduces your mortgage interest by .25%. If you want to minimize your taxes for the coming year by reducing your total income, purchasing mortgage points when you buy a home is a solid way to do so. 

2. Private Mortgage Insurance 

Private mortgage insurance (or PMI) is another itemized deduction that can be applied to your annual taxes. PMI comes into play for homebuyers with a down payment of less than 20%, which the lender charges as an extra layer of protection in case of default. Usually calculated at a cost of $30-$70 per month for every $100,000 of the loan, PMI is another deduction that can benefit your annual taxes. 

3. State and Local Property Taxes 

While you have a new set of taxes to account for once you become a homeowner, these taxes can also be deducted every year from your state and federal tax returns. This is another area where it’s important to review your closing documents. Moreover, pre-paid taxes may be involved in the home purchasing process that can also be deducted.  

4. Profits When Selling 

While capital gains taxes may come into play when it comes to selling your home (especially if you’ve made a large profit), you may be able to avoid these taxes somewhat or altogether. The IRS offers a write-off for property owners to exclude up to $250,000 of profits on their home sale. Additionally, it is up to $500,000 for married couples, provided that you have lived in the residence for two of the past five years. 

5. Renewable Energy Credits 

Once you’ve purchased a home, you may start making improvements, which could be tax deductible if they are environmentally friendly upgrades.  

Examples include installing: 

  • solar panels on your roof 
  • energy-efficient heating or cooling systems  
  • new insulation to reduce your energy costs  

Before you start to make your home your own, consult with your tax planning expert to see if the improvements could lead to a significant benefit when it comes time to file your annual taxes. 

6. Home Office Deductions 

Individuals who work from home will likely see some of the biggest benefits from a home purchase thanks to the home office deduction. However, claiming a home office deduction has some prerequisite requirements. It would help to have a designated portion of the home only used as your home office. Additionally, you will need to prove that your home office is the main spot where you conduct business, regardless of your profession. 

If you qualify for a home office deduction, several new expenses can now be deducted from your annual taxes. A sample of these expenses includes the following: 

  • Homeowners insurance 
  • Electric bills 
  • Water bills 
  • Internet bills 
  • Repairs to the office or the entire home 
  • Cleaning fees 
  • Community costs, like trash service, landscaping service, or subdivision/community fees 

Your tax planning and compliance partner can help navigate these many options and opportunities to ensure the most deductions possible, regardless of whether you itemize or take the simplified home office deduction 

Remember that in order to file, you’ll need to know both the square footage of the office and your entire home. Therefore, this will come into play when it comes to calculating your home-wide expenses, like utility bills or other expenses.  

Are You Purchasing a New Home and are Not Sure How It Will Impact Your Taxes? Waters Hardy can help! 

New homebuyers have to enlist a range of personnel to make a home purchase, including a realtor, home inspector, and attorney. However, don’t forget to consult your tax professional to ensure that your purchase has significant financial benefits now and in the future.  

The experts at Waters Hardy can tackle the details of financial planning tax strategies when it comes to home purchases, so you can concentrate on the many details of buying a home.  

Reach out to us today to discuss the importance of tax planning for this life milestone, and the many life milestones to come. With Waters Hardy as your tax planning partner, you can ensure that all of life’s big events positively impact your taxes and your bottom line. 

Contact us today.  


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