Tax Tips and Breaks for New Homeowners: Deductions and Incentives to Consider

NEW YORK (MainStreet) -- When it comes to mortgage rates, we've heard the term "record lows" for years now. And while interest rates on home loans have wavered a bit, they've recently dipped to the lowest levels in nearly two years. The benchmark 30-year fixed mortgage rate is still well under 4%. Low interest rates and tax breaks are the rational reasons for new homeowners to move from renting an apartment to owning a home. Of course, having a place to call your own is often the overriding emotional reason that trumps all.

Low mortgage rates are a given – but are the tax breaks really that substantial? MainStreet asked tax experts to strip away the jargon and give us the plain facts -- and some tax hacks -- for first-time homeowners.

First the bad news: one tax incentive for buying a home is no longer in play.

"As a new homeowner you might know someone who bought a house a few years ago that received the first-time homebuyer tax credit," said Jayson Mullins, CEO of Top Tax Defenders, in Houston. "Well you should know that as of July 1, 2010 this credit is no longer available." 

But of course, there are still tax breaks – with some fine print. The most commonly cited is the mortgage interest deduction.

"There are definite advantages and deductions to owning a home -- or a second vacation home for that matter -- but mortgage interest and property tax deductions are not a 100% sure deduction," Vincenzo Villamena, CPA and managing partner of the Online Taxman based in New York, told MainStreet. "They need to be large enough to be above the standard deduction, which with kids, etc., can be well over $10,000 to $15,000. Bottom line: don't buy a house just to get a deduction. It should be viewed as a long-term investment in one's future, not a tax planning tool."

Gabe Lumby, a CPA in Springfield, Mo. agrees that "people get all worked up" about the mortgage interest deduction but reminds us that the IRS allows taxpayers to take the higher of the standard deduction or itemized deductions. The standard deduction for 2014 for single taxpayers is $6,200 and for married joint filers $12,400. For some, that can be a high hurdle to clear.

"We own our own home but the mortgage interest, plus our real estate, personal property, and sales taxes, plus our medical expenses never exceed the standard deduction," Lumby admits. He also says that itemized deductions are not tax credits -- they reduce your taxable income.

"If you are in the 28% tax bracket, a dollar spent on mortgage interest will only save you 28 cents in taxes, not a dollar -- most people don't get this," Lumby says. "Also, if you still end up taking the standard deduction, the mortgage interest paid does not help you at all on your taxes."

If total mortgage interest payments do clear that standard deduction hurdle, a taxpayer may be facing a "long form" tax filing for the first time. Tax expert and enrolled agent Steven J. Weil in Fort Lauderdale says that can lead to some additional often-forgotten deductions.

"New homeowners are often itemizing their taxes for the first time," Weil says. "While they may know that they can deduct mortgage interest and real-estate taxes, they may not realize that they can also deduct the items they donated to charity, such as the appliances they replaced or the furniture they donated. A common mistake is forgetting to get receipts for these items so that they can prove the donation."

And recent action by Congress is allowing another tax break for first time homeowners, according Lisa Greene-Lewis, a certified public accountant and TurboTax tax expert.

"There is an additional deduction for you thanks to the recent vote by Congress extending temporary tax provisions called tax extenders," she says. "The Mortgage Insurance Premium Deduction is a tax benefit available if your lender required you to buy mortgage insurance in order to secure your loan."

The tax pros also noted that new homeowners can often get tax credits for energy-saving improvements made to a house, such as a new boiler, insulated windows and other energy-efficient upgrades. But not all the breaks apply to just income tax.

"New homeowners often spend a lot of time and money in furniture and home improvement stores so they should keep track of their sales tax as the actual amount may exceed the amount on the chart," Weil adds. "Since homeowners get to deduct sales tax or state income tax, this strategy works best for those in states with low or no income tax."

And, there is also the matter of capital gains taxes; meaning, if you make money on the eventual sale of your home, you may not owe taxes on that profit – a tax break unique to homeownership.

"If you own your own home and stay in it for longer than two years, you do not have to pay any taxes on the potential gain from the sale as long as it does not exceed $250,000 for single taxpayers and $500,000 for married tax payers," Lumby says. "If you live in a part of the country with rapidly fluctuating housing costs, you can make some really good money and never pay tax on it." 

And if your new home is the result of a career move, you may be entitled to yet one more tax break.

"If the purchase of your new home was related to a new job, you may be able to deduct your moving expenses if your new job is 50 miles farther from your old house than the distance between your old house and old job," Lisa Greene-Lewis explains. "You may be able to deduct the cost of packing and shipping your possessions, traveling to your new home, storage of up to 30 days, and even the cost to move your pet."

-- Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick

More from Mortgages

How to Get Your First Homebuyer Loan

How to Get Your First Homebuyer Loan

How to Find the Best Mortgage Calculator

How to Find the Best Mortgage Calculator

Ranking the Best Mortgage Lenders

Ranking the Best Mortgage Lenders

How Does a Home Equity Loan Work?

How Does a Home Equity Loan Work?

How Much Are Closing Costs on a New Home Purchase?

How Much Are Closing Costs on a New Home Purchase?