Have you recently bought a new home? Most Americans in a similar position wonder if this big asset purchase will help them lower their income tax bill. The answer can be complicated, but here are a few answers to your questions to help you learn more.
Does the Home Purchase Affect Taxes?
Generally, the actual purchase of a primary residence doesn't affect your taxes in the year it occurs. This is because the expenses of buying the home aren't deductible, but rather add to what is known as the tax basis of the house.
Tax basis is the amount you invest in the property as a capital asset, and it include the purchase price, major improvements, taxes, and other fees. Tax basis is the amount you can then exempt from taxable income when you sell the home.
Can You Deduct Expenses on Your Taxes?
Homeownership in the United States is encouraged through the provision of deductions for certain expenses related to it. These expenses are part of what's known as itemized deductions. The biggest itemized deductions many taxpayers deduct are the interest on their mortgage payments and private mortgage insurance (PMI).
However, not all homeowners use itemized deductions. The standard deduction allowed for couples filing jointly in 2021 is $25,100. Therefore, if your combined itemized deductions add up to less than this amount, you are better off claiming the standard amount instead. Some homeowners will fall under this threshold while others may do better itemizing.
What Other Help Could Your Home Provide?
Your house may be of some other use on your income taxes. Many people today claim the home office deduction, for instance, which can be calculated using the actual costs of running your overall home. And, if you later use some of your home equity in the form of a loan or line of credit to make improvements to the house itself, you can usually deduct this interest as well.
In addition, tax credits are usually offered for homeowners who make certain energy efficient improvements to their house. This includes things like Energy Star appliances and products and renewable energy updates.
Where Can You Learn More?
Want to know more about the effect your particular primary home purchase will have on your personal taxes? Start by meeting with a tax preparation service in your state today. They will work with you to identify all the ways your income taxes can be lowered as a homeowner. The result will undoubtedly help you have the most successful start to homeownership as possible.