Home Ownership
Home Ownership

What your clients can deduct when they buy their first home

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Making the dream of owning a home a reality is a big step for many people. Whether a fixer-upper or dream home, homeownership is a milestone that can come with a learning curve. You can help your clients who are first-time homeowners to become familiar with authorized deductions, programs that can assist with home ownership, and the use of housing allowances.

When it comes to home ownership, the IRS considers a home to be a house, condominium, cooperative apartment, mobile home, houseboat, or house trailer that contains a sleeping space, toilet, and cooking facilities.

Most home buyers take out a mortgage loan to buy their home, and then make monthly payments to the mortgage holder. This payment may include several costs of owning a home. The only costs the homeowner can deduct are:

Taxpayers must file a Form 1040 or Form 1040-SR, U.S. Income Tax Return for Seniors, and itemize their deductions to deduct home ownership expenses. However, taxpayers can’t take the standard deduction if they itemize.

Non-deductible payments and expenses

Homeowners can’t deduct any of the following items:

  • Insurance, other than mortgage insurance, including fire and comprehensive coverage, and title insurance.
  • The amount applied to reduce the principal of the mortgage.
  • Wages you pay for domestic help.
  • Depreciation.
  • The cost of utilities, such as gas, electricity, or water.
  • Most settlement or closing costs.
  • Forfeited deposits, down payments, or earnest money.
  • Internet, Wi-Fi system, or service.
  • Homeowners’ association fees, condominium association fees, or common charges.
  • Home repairs.

Mortgage interest credit

The mortgage interest credit is meant to help individuals with lower income afford home ownership. Those who qualify can claim the credit each year for part of the home mortgage interest paid.

A homeowner may be eligible for the credit if they were issued a qualified Mortgage Credit Certificate (MCC) from their state or local government. An MCC is issued only for a new mortgage for the purchase of a main home. The MCC will show the certificate credit rate the homeowner will use to figure their credit. It will also show the certified indebtedness amount and only the interest on that amount qualifies for the credit.

Homeowners Assistance Fund

The Homeowners Assistance Fund provides financial assistance to eligible homeowners for paying certain expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and also displacements of homeowners experiencing financial hardship after Jan. 21, 2020.

Minister or military housing allowance

Ministers and and members of the uniformed services who receive a nontaxable housing allowance can still deduct their real estate taxes and home mortgage interest. They don’t have to reduce their deductions based on the allowance.

More information:
Publication 530, Tax Information for Homeowners
Publication 936, Home Mortgage Interest Deduction

2 responses to “What your clients can deduct when they buy their first home”

  1. I would like to know more about the 401k withdrawal to purchase a first home.
    I think the limit was $10.000 but I have a client that had to put up $100,000 during the bidding wars of 2022.
    The tax penalty was the full 20%.
    Is there any advice for recapturing the additiona tax withheld?

    • Hi David – thanks for your question. I checked with the author of ProConnect Tax Guide, who provided this answer:

      “The 10% tax does not apply to distributions made to an individual from an IRA if the distributions are “qualified first-time home buyer distributions up to $10,000 of first-time home buyer expenses. What should be especially noted is that this is only applicable to distributions from IRAs.

      If the money was distributed from a 401(k) plan, then they will be subject to the 10% early withdrawal penalty. I believe the rule is that the IRS will do a mandatory 20% tax withholding on those distributions, but there will be a 10% penalty.”

      Hope that helps. Thanks.