How to Save on Taxes When Buying a Home

Besides the obvious benefits of having a home to call your own, one of the biggest financial benefits of home ownership is the tax savings you’ll enjoy. When meeting with potential clients, we always urge people to consult their CPA to understand their tax savings at the same time you are getting preapproved for your loan. Looking at the big financial picture is a helpful way to understand what makes sense for a payment you feel comfortable with.

Disclaimer, disclaimer: I am not a tax professional and like all things taxes you should consult a professional about the specifics of your situation.

According to NOLO, here are some of the deductions you are eligible for:

  • Mortgage Interest. Interest that you pay on your mortgage is tax deductible, within limits and if you itemize your deductions. You can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first or second home. The maximums are halved for married taxpayers filing separately.

  • Property Taxes. Property taxes are fully deductible from your income (Property taxes in SF are approximately 1.1% of purchase price)

  • Home Office Deduction. If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.

  • Points. If you paid ‘points’ on your loan, they are fully deductible. One point is equal to 1% of the loan principal.

  • Home Improvement Loan Interest. If you take out a loan to make substantial home improvements, you can deduct the interest, with no dollar limit. However, the work must be a "capital improvement" rather than ordinary repairs.

  • Here is a very basic loan calculator you can use to get a sense of what your savings could be.

Down the road:

While selling your home is but a distant thought, once you do become a homeowner, you’ll want to begin documenting your upgrades to save on taxes down the road. Start now as digging through old bank statements in the midst of putting your home on the market is no fun!

What can I deduct to save on taxes on the sale of my home?

When you make improvements to your home, the costs of those improvements are added to your basis. Some examples of improvements include replacing a roof or remodeling a kitchen. Repairs and maintenance, however, are not improvements and cannot be added to your basis. Fixing a toilet, for example, is a repair, not an improvement.