Becoming a first-time homeowner isn’t for the faint of heart, nor is it for someone who doesn’t have their financial ducks in a row. A lot can go wrong, whether you negotiate for the purchase of an existing home or build a new one, and you’ll need plenty of cash upfront to pay for closing costs on your new mortgage, moving expenses, furniture and decor.
Still, plenty of people took the plunge and dove into homeownership last year. According to the U.S. Census Bureau, approximately 694,000 new homes were sold in December 2019. That’s down slightly from the number of new home sales in November 2019, which worked out to 697,000, but it’s also considerably higher than the 564,000 new homes that sold nationwide in December 2018.
Buying your first house? 5 tax tips to consider
If you’re one of the many people who bought your first home late last year, or any time in 2019, there are plenty of tax tips that you should know about. Here is the most prevalent advice that could help you save big this tax season.
See if you qualify to deduct mortgage interest
While the Tax Cuts and Jobs Act of 2017 raised the standard deduction for everyone and drastically limited who will itemize when they file their taxes, you can still deduct mortgage interest on your taxes up to certain limits if you do itemize.
For those who took out a mortgage for a home purchase in 2019, this deduction is limited to interest charged on the first $750,000 of combined mortgage debt, or $375,000 in mortgage debt if you’re married and filing separately.
See if you can deduct mortgage points
If you paid mortgage “points”, or upfront fees paid to a lender in order to secure a lower interest rate, you may be able to deduct those points if you meet certain requirements.
For example, the mortgage must be for your primary residence, and the points cannot cost more than what other local lenders are charging. Points also cannot be paid in place of other closing costs if you want to maximize this homeownership benefit for tax savings.
Check for the SALT deduction
If you do have enough deductions on your taxes to itemize, then you should also explore the possibility of being able to deduct state and local taxes on your federal tax bill. The SALT tax deduction, as this deduction is commonly known, is worth up to $5,000 for a married person filing separately and $10,000 for other tax filers, notes the Internal Revenue Service (IRS).
Check for state-based credits for first-time homebuyers
While you can no longer qualify for a federal tax credit for new homebuyers, some states have rolled out their own homebuyer tax credit programs. If you live in Florida, for example, the Florida Housing Mortgage Credit Certificate (MCC) Program may let you claim 10% to 50% of your mortgage interest each year as a federal tax credit. This program has income and home purchase price limits, however, so not everyone may qualify.
That’s just one example, but since other states have their own credits you might meet the requirements for, you should check with the state housing authority where you live.
Look into the home office deduction
To qualify for the home office deduction, you must use part of your home exclusively for business purposes and your home must also be the principal place your business operates from. This deduction is available for homeowners and renters, and it can apply to any type of property.
The amount of this deduction can vary, and you can figure it out in two different ways. You can take a standard home office deduction, for example, or you can determine the deduction amount based on the amount of your expenses and the percentage of your home that’s designated for business use only.
Should you use your tax refund for a home remodeling project?
If the tax tips above help you reduce your taxable income this year, it’s possible you’ll get a larger refund, and perhaps even enough to take on a remodeling project. But, which project should you work on in your first year as a homeowner? For the most part, you should stick to remodeling opportunities that have the potential for the best return on investment.
According to Remodeling magazine’s 2020 Cost vs. Value Report, projects with the best average return on investment this year on a national level include manufactured stone veneer (95.6% of costs recouped), garage door replacement (94.5% of costs recouped) and a minor, mid-range kitchen remodel or fiber-cement home siding replacement (both 77.6% of costs recouped).
Saving money on taxes is crucial as a homeowner, but you should make sure you put those savings to use. Focus on high-value remodeling projects that bring value to your home in ways that matter most to you and you’ll be a lot better off.