What Kind of Deduction Do You Get When You Buy a Home?

A home purchase comes with certain tax benefits.

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Purchasing a new home can be exciting -- and stressful. So much paperwork must be completed, and then, when it is done, you must move in. It can be easy to forget about the tax benefits that you receive from the purchase. Every home purchase transaction uses a HUD-1 form, which outlines all of the costs associated with purchasing the home, as well as where all of the money goes. Keep this form to document all of your deductions, particularly in the year where you purchase the home.


Some borrowers pay a percentage of the loan value, called points, to receive a lower interest rate, with 1 point equal to 1 percent of the value of the mortgage loan. When purchasing a home, you can deduct points from your taxable income in the year that you buy the home, even if the seller pays them. Points you pay are reported to you on Form 1098, which your lender will send to you after the end of the tax year. If you pay 3 points on a $200,000 loan, you pay a total of $6,000, and would save $1,500 in taxes if you are in the 25 percent tax bracket.

Mortgage Interest

Mortgage interest is the most common deduction people think about when it comes to home ownership. Mortgage interest on loans of up to $1 million used to purchase or substantially improve your home is deductible. You must itemize deductions to take advantage of the mortgage interest deduction. Your mortgage lender may also charge a per-diem prepaid interest from the day that your loan closes until the end of the month, which is also deductible.

Property Taxes

Local property taxes that are assessed uniformly on all properties in the jurisdiction and based on the value of the home are deductible. Often, these property taxes are pro-rated at the time of sale, and the prorated amounts you pay are deductible. If the previous owner paid the property taxes from July 1 through the end of the year, and you purchase the home on August 1, you may pay the previous owner for the taxes he already paid. These taxes are deductible, and will be shown on the HUD-1 closing statement.

Closing Costs

Closing costs, such as appraisals and legal fees, have tax implications, but are not deductible as an itemized deduction. Closing costs can be added to the value basis of your home. By increasing the basis of your home, you may be less likely to face a taxable gain at the time of sale. You can also add the price of certain improvements to this basis as well. Keep track of any improvements that you make on the home right after you purchase, and throughout the time that you own the home as well.