What Deductions Can You Claim When Buying a Home?

Whether you’re buying a new primary residence or buying a vacation home, your purchase makes you eligible for several tax deductions, especially if you finance your purchase with a mortgage. However, all of these deductions require you to itemize your deductions, which means forgoing the standard deduction.

Mortgage Interest

When you take out a mortgage, you generally add a very large expense to your budget. Fortunately, you also add a large income tax deduction, based on the amount of mortgage interest you pay. This is especially true at the start of the mortgage when the majority of your monthly payment goes to paying interest. To qualify, the home must be either your main home or your second home. If it is a second home, and if you rent it out, you have to use it for the longer of 14 days or 10 percent of the time you rent it out for it to qualify. You are limited to deducting the interest on the first $1 million of your mortgage debt unless you are married filing separately, in which case the limit for each spouse is $500,000.

Discount Points

Discount points are fees you pay to get a lower interest rate on your mortgage. If the home you are buying is going to be your main home, if the points don’t replace costs that would usually be itemized such as inspection fees, and if the points are not more than are normally charged in your area, you can deduct the points immediately. If the home does not meet all of these conditions, such as if you’re buying a vacation home, you can still deduct the points over the life of the mortgage as long the mortgage is for 30 years or less and either you borrow less than $250,000, pay four or fewer points if your mortgage term is 15 years or less, or pay six or fewer points if your mortgage term is more than 15 years.

Real Estate Taxes

You can also deduct the real estate taxes charged by state and local governments that you pay on your new home. However, when figuring your deduction, only include the amount actually paid during the year. For example, if your mortgage lender requires you to use an escrow account, only deduct the money paid from the escrow account for taxes during the year, not the amount you paid into the account.

Mortgage Insurance

At the time of publication, the mortgage insurance deduction had expired and not yet been extended for the 2012 tax year. Lenders typically require mortgage insurance if you can only afford a small down payment. Mortgage insurance includes private mortgage insurance premiums, VA funding fees and Rural Housing Service guarantee fees. If Congress does extend the deduction, you're allowed to write off the mortgage insurance you pay as long as your income falls below the annual limits.