Tax benefits every first time home buyer should know
Tax can be a very complicated financial aspect to understand. If you are planning to buy your first home, the downpayment is one of the major expenses to be borne that can be charged at 3% of the total purchase price on an average. The mortgage taken will include components like interest payments, closing costs, and other fees and charges as applicable to the transaction. Tax is applicable on multiple of these components and associated transactions.
To ease this financial burden, there are a number of tax breaks you can take advantage of. Here is a must know the list of every first time home buyer.
- Interest Deduction
Interest charged on the mortgage is one of the tax benefits you can avail. The benefit is even more substantial for first time home buyers and loan borrowers as the interest rate charged will be steeper in the initial years of borrowing. The tax credit can be availed for interest paid on loans of up to $1 million or $500,000 depending on the type of income tax return filed.
- Mortgage interest credit
While the mortgage interest deduction reduces your taxable income, the mortgage interest credit allows for another tax break opportunity for first time home buyers. Applicants can get back up to 20% or 30% of the interest paid on the amount borrowed as a straight tax credit.
- Points Deduction
Mortgage points allow the loan borrower to apply for a low-interest rate that qualifies for a tax deduction as well. The points can be bought to lower the interest rate significantly making it one of the popular tax breaks to be availed by first time home buyers.
- IRA (Individual Retirement Account) withdrawals
Withdrawals can also be made from retirement accounts to meet payments for the new home. Up to $10,000 can be withdrawn from your IRA account without any penalty applicable.
- Property tax deduction
Property taxes paid on any type of real estate are also eligible for tax breaks, especially beneficial for first time property buyers.
- Home improvement
Home equity loans taken to secure the capital expenditure incurred for home improvements can also lower the taxes accrued on your taxable income.
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