First-Time Homeowner’s Guide to Tax Reward

Homeownership offers rewards: the opportunity to build equity, create the home environment you desire, build a strong credit history, and enjoy tax rewards! First-time homeownership brings people a sense of pride, enabling them to do everything from enjoying their beloved pets to painting their walls their favorite colors. We may not think of it daily, but come tax time, we’re quickly reminded that Uncle Sam encourages Americans to own homes and makes homeownership financially rewarding.

If you’re on the fence about buying your first home, educate yourself on the tax benefits of homeownership, and you’re sure to be enticed to move forward. Take advantage of benefits at the time of purchase, and again when you sell your home. Here are some tax benefits of homeownership:

Mortgage Interest

  • Deducting mortgage interest on your taxes is one of the greatest tax benefits of home ownership—primarily in the early years.
  • If you choose to itemize deductions on your income tax, the interest you paid on your mortgage for your primary place of residence is deductible.
  • You can claim a deduction for the interest you paid on your mortgage for not only building a home but also buying a home or doing home improvement. Although some restrictions apply to this great opportunity, if you get good tax advice from a professional, you can verify if you qualify for these great tax rewards.
  • The mortgage interest you pay monthly can be deducted from your taxes if the amount of your mortgage is at or below $750,000.

First-Time Homebuyer Tax Benefits

  • To help you with your home purchase, the IRS allows first-time homebuyers to withdraw up to $10,000 from your traditional IRA without penalties.
  • The IRS also allows your spouse, parents, children, or grandchildren to add another $10,000 from their own IRA accounts, totaling up to $20,000 combined to help you get into your first home.
  • First-time home buyers can borrow up to half of their 401(k) balance up to $50,000 toward their home purchase. However, the interest on the 401(k) loan is unfortunately not tax deductible.

Closing Costs and Points

  • Closing costs are part of the home buying process. They consist of fees to process the home sale, check the title, points charged by your lending institution, appraisal fees, fees to write the contract, and record the home sale. The good news is, most of these fees can be deducted in part or in whole on your tax returns.

Discount Points

  • Discount points can be deducted if you purchased the home within a year of doing your tax returns and if your deductions are itemized.

Home Improvements

  • There’s nothing like a freshly upgraded bathroom, kitchen, or back porch area. When you upgrade your new home, it will often stay in better shape for a longer period of time, increasing its overall value.
  • Once you are settled into your home, if you choose to make home improvements and fund them by refinancing, you can enjoy tax benefits from the refinancing of your home.

Energy Efficiency

  • In various parts of the country, there are tax benefits for improving your energy efficiency, making your investment extremely worthwhile. When you invest in a new air conditioning unit to save on energy and then get rewarded on your taxes for it, it makes sense to upgrade.

Capital Appreciation

  • As your home increases in value, your capital gains are not taxed by the federal government.
  • You can exclude up to $250,000 in your home appreciation when considering your capital gains.

When the Time Comes to Sell Your Home

  • There are some facts that impact your taxes to consider when it comes time to sell your home. If you sell your primary residence and make money on it (which you should), it’s possible to at least partially exclude the capital gain from being taxable.
  • If a home is sold at a loss, the seller can’t claim the loss as a tax deduction.

Capital Gains

  • Although there are specific requirements that must be met, and this exclusion can only be used every other year, if you are filing your taxes as a single, you can exclude up to $250,000 of capital gains you receive from selling your primary residence. For those who are married, filing jointly, up to $500,000 can be excluded if you meet the requirements. The home had to be used as your primary residence for at least 2 out of 5 years before you sold the home to enjoy this exclusion.

The Long-Term Cost of Renting

Renting has its place, but to rent for a long period of time can be difficult on your finances in the long run. Learn the actual cost of renting versus buying a home and get motivated to reach your homeownership dreams. Discover the advantages of homeownership and step out to make your homeownership desires a reality. There are strategies to save for your down payment that can help catapult you into your first home. Avoid common mistakes first-time homeowners make by educating yourself, and connecting with trusted professionals.

First-Time Homebuyer Incentives

Do your research for first-time homebuyer incentives on the state and local levels. There may be down payment assistance programs, closing costs assistance, or matching programs, depending on your state.

Check with the U.S. Department of Housing and Urban Development ( And, if you choose to buy a rural property, there may be assistance available from the U.S. Department of Agriculture. If you are a veteran, check with the Department of Veterans Affairs for first-time homebuyer assistance programs. Research the programs and their requirements to find the one you are a good candidate for, based on their unique criteria. Then work with a lender who is familiar with the program and its unique criteria.

Ready to buy your first home?

Schedule a free consultation and let a McGraw agent show you how simple it can be to get you into your first home. And if you’re not quite ready for that consultation, take a look at our listings.

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