How Much can a Homebuyer Save on Taxes?

If you purchased a home last year you probably are looking for a little bit of help when it comes to what to expect for claiming any tax benefits possible from the purchase of your home. There are certain deductions that homeowners can claim on taxes that can possibly benefit you and bring you a return (or a larger return).How Much Can a Homebuyer Save on Taxes

Here is an overview of how much money you could possibly get back in taxes for purchasing a house based upon the average hypothetical homeowner to help you see how much a homeowner could benefit from itemizing their taxes or taking the standard deduction.

First, let’s give a description of what we will use for an average homeowner to help understand some deductions.

This homeowner is married and filing jointly with their spouse they live in a typical suburban area just outside of the city where the median home price is $189,000. The household income for our example buyer is say $3404 per year. The homeowner began making mortgage payments in May 2021 on the $189,000 that they borrowed. The homeowner is paying 4.5% interest on their mortgage and has made a 6% down payment of $11,340.

Mortgage interest deduction

One of the first tax benefits homeowners receive when purchasing a home is a mortgage interest deduction, this means that the home buyer can deduct the interest they pay on the mortgage every year from taxes they owe on loans up to $750,000. Remember this is for a married couple that is filing jointly.

If a home is purchased at the beginning or middle of the year the first year of homeownership will yield the biggest mortgage interest deduction because mortgages are almost always amortized. Meaning that the interest payments are heavier at the beginning of payments due on the mortgage.

The best plan for utilizing this deduction is to itemize deductions instead of taking the standard deduction. As long as itemized deductions are more than the standard deduction. Determining this will take a little bit of math.

In 2019 for example the standard deduction for a married couple that was filing jointly was $24,400 if you did not have more than this amount to write off it makes more sense to take the standard deduction. In most cases, it makes more sense to itemize this deduction if you are a single person that is making a large amount of income. A single person is only required to pay half of the current requirement for married people.

If the example homeowner from above itemized their taxes using this number they could’ve deducted approximately $5500 in mortgage interest from taxable income. This is adding up the interest they paid from the time they purchased the home through December. You can find the exact amount of interest you paid on your mortgage over the year through a tax document provided by your loan servicer.


At the time of purchasing a home, it is possible to purchase discount points for the mortgage which are pretty much-prepaid interest. These are very similar to home mortgage interest points and can be deducted if you itemize your taxes.

The IRS states that points can be deducted ratably over the life of the loan or deduct it all at once in the year that they were paid. You can also fully deduct points paid on a loan to improve your main home if it meets certain criteria. There are however some income limitations to this type of deduction.

These points only qualify if they are actually what is considered bona fide discount points which means an amount of money paid to buy down your mortgage interest rate. Your settlement statement needs to show that there were points purchased. These points need to have been computed as a percentage of your mortgage principal.

Using the example of the homeowner above purchasing one point in order to lower their interest rate from 5.5% to 5.25% would have cost them $1776.60. They could write off this expense which would lower their tax liability by that exact amount.

Private mortgage insurance

If you’re making less than $50,000 as a single person or less than $100,000 as a married couple it could be possible to deduct the cost of private mortgage insurance. This is a monthly fee added to the cost of your mortgage meant to help protect the lender if you default on your loan.

Your deduction is the exact amount that you paid for private mortgage insurance over the previous year.

Mortgage credit certificate

A mortgage credit certificate is a document provided by the lender that originated the loan to the borrower and it directly converts a portion of the mortgage interest paid into a nonrefundable tax credit. These credits are used in low to moderate-income situations. The maximum credit that a borrower can receive is $2000 a year.

Property tax deduction

Additionally, homeowners can deduct an amount of property taxes paid from their tax liability. Depending upon the current property tax rate, where your home is located, and how much you paid for your home it could be a substantial amount.

Home office deduction

Since the pandemic shut many things down there are a large number of Americans working from their home. If you work from home, you can get a tax deduction based on the square footage of your home office. Most commonly this deduction is about five dollars per square foot for up to 300 ft.² of office space. Homeowners should be very cautious of using this tax write-off, however.

Many times, this deduction flags the IRS to audit your taxes as it is often used by homeowners with a tendency to tweak the truth. Many times, the amount of money that will be saved is not worth the scrutiny of an audit. To be able to write off your home office it needs to be used exclusively for business purposes. So, if you work from the kitchen table from your laptop this would not count.

Some home upgrades

In some cases, you can deduct environmentally friendly upgrades made to your home like solar panels. For the year 2021, you can deduct 22% of the cost of installation for this green upgrade. This is the last year in which you are able to do so.

The exact dollar amount which you can deduct from your taxes for home-related items varies depending upon each property. To get the most out of your tax deductions it is always best to consult a tax professional.

For more information on purchasing a home in West Ocean City Maryland and surrounding areas please contact us anytime.

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