Michaela Phillips, Guaranteed Rate, Inc.

Michaela Phillips, Guaranteed Rate, Inc.

BOULDER – Buying your first home is a huge step, and it requires careful consideration. For many people, that means comparing lifestyle factors like mobility and whether or not they are ready to make that long-term financial commitment. If you’re in the process of weighing out those financial pros and cons, don’t forget to factor in the tax benefits of home ownership.

Mortgage interest

In many cases, homeowners are eligible to deduct the interest they pay on a mortgage. That applies to both the primary residence and a second home, but there are a few restrictions to keep in mind:

The loans used to purchase, construct, or improve upon your primary residence and a second home are eligible. Third, fourth, and higher order loans are not.

Where your income taxes are concerned, the loan for which you are trying to deduct interest must be secured by the property in question. These loans include a mortgage to buy your home, a second mortgage, a line of credit, and an equity loan. If your loan is secured by some other asset, it is considered a personal loan, and the interest is not tax deductible.

The important thing for homeowners to understand is that in order to take advantage of your mortgage interest deduction, you will need to itemize your taxes. Those who itemize do not get to claim the standard deduction, so you should choose the option that results in you paying the lowest taxes. For 2015, the standard deduction for married couples (filing jointly) is $12,600, and if you are single, the standard deduction is $6,300.

To put this into perspective, let’s say that you purchase a home for $500,000 with a 30-year fixed rate mortgage. For the sake of simplicity, we’ll say that you are paying 3.75% interest on your loan. In the first year of your loan, you will pay a total of about $18,593. Obviously, this is more than the standard deduction.

On the other hand, say you live in an area of the U.S. where the average home sells for about half that price. Using the same scenario (a 30-year fixed rate loan at 3.75%), you purchase a home for $250,000. In this case, your first year interest payments will total to about $9,296. For married couples, this alone is not enough to exceed the standard deduction allowed by the IRS, so your family will not necessarily benefit from itemization.

Property taxes

Any state, local, and federal real estate taxes are deductible in the year that the payment is made (not necessarily the year that the payment is for). In most cases, if you did not exceed the standard deduction amount with your interest payments alone, the amount you paid in property taxes will be enough to push your total over that threshold.

This can be especially advantageous during the first year of home ownership, because even if you convinced the seller to pay your property taxes for the entire first year (as opposed to only paying for their portion of the year), you can claim this deduction. Nobody can take a deduction for taxes paid against your property, except you.

As an extension of this, if your district’s school taxes are calculated against your assessed property value, those are also deductible.

Income taxes can be very complicated, so it’s important to speak with your tax professional about which deductions will be most beneficial to you and your family. If you would like to discuss the financial benefits of home ownership or learn more about your financing options, contact me at [email protected].


By Michaela Phillips, Guaranteed Rate, Inc.

Michaela Phillips is the Vice President of Mortgage Lending at Guaranteed Rate, Inc., the 8th largest retail mortgage company in the country. Since entering the mortgage industry in 1994, she’s consistently been a top producer. Being a VP at Guaranteed Rate offers many advantages to her and her clients including unparalleled customer service, efficiency, and most importantly competitive rates. NMLS: 312874