First-Time Home Buyer Tax Benefits: Complete Guide

Ellie Brooks

Written By Ellie Brooks

Published 06/15/23
First-Time Home Buyer Tax Benefits: Complete Guide

Purchasing your first home is an exciting milestone in life, and it comes with a range of financial benefits, including various tax incentives. The government offers tax benefits specifically designed to help first-time homebuyers ease the financial burden of homeownership. Now, let's explore the tax benefits available to first-time homebuyers and how to take advantage of them.

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Eligibility for Tax Deductions and Exclusions

While homeownership offers significant tax advantages, it's crucial to understand the eligibility criteria and limitations associated with tax deductions and exclusions. Here are a few essential points to consider:

  • Primary Residence: The property must be your primary residence to qualify for most tax benefits. Vacation homes and rental properties may have different tax implications.

  • Mortgage Interest Limitations: There are limits on the amount of mortgage interest you can deduct. For mortgages obtained after December 15, 2017, you can deduct interest on loans up to $750,000 ($375,000 if married and filing separately). Loans taken before this date may have higher limits.

  • Capital Gains Exclusion: To qualify for the capital gains exclusion, you must have lived in the home for at least two of the past five years before selling. Additionally, there are limits on the maximum amount of profit that can be excluded.

Essential Steps for First-Time Homeowners

As a first-time homeowner, you no doubt have numerous questions regarding tax filing. Follow these essential steps to ensure a smooth and successful tax season:

  • Gather Relevant Documents: Collect all necessary documents, such as Form 1098 (Mortgage Interest Statement) from your lender and Form 1099 (Property Tax Statement) from your local taxing authority.

  • Itemize Your Deductions: To maximize your tax benefits, consider itemizing your deductions instead of taking the standard deduction. This allows you to claim deductions for mortgage interest, property taxes, and other eligible expenses.

  • Consult a Tax Professional: If you're unsure about specific tax matters or need personalized advice, consulting with a qualified tax professional is highly recommended. They can guide you through the complexities and ensure you're optimizing your tax situation.

  • Stay Informed: Tax laws and regulations may change over time. Stay updated with the latest developments through reliable sources, or consult a tax professional to ensure compliance and maximize your benefits.

First-Time Homeowners: The Tax Benefits of Owning a Home

Becoming a homeowner brings various financial advantages, including tax benefits. Understanding these benefits can significantly impact your overall tax liability. Let's explore some key tax advantages associated with homeownership:

Deducting Mortgage Interest and PMI

Under the Tax Cuts and Jobs Act of 2017 (TCJA),homeowners can deduct the interest paid on their mortgage, provided the borrowed amount is $750,000 or less. If you purchased your home on or before December 15, 2017, you can take advantage of the old limit of $1 million. This deduction can be claimed yearly if you're paying your mortgage and for subsequent home purchases, as long as the loan amount remains below the threshold.

Additionally, if your down payment was less than 20 percent, you likely have private mortgage insurance (PMI). The good news is that you can deduct PMI payments if your adjusted gross income is below $100,000 (for married individuals) or $50,000 (for single individuals).

Deducting State and Local Taxes

The TCJA allows homeowners to deduct state and local taxes, commonly referred to as SALT deductions, up to $10,000. If you pay your taxes through an escrow account, the amount will be reflected on your Form 1098. For those who pay local taxes directly to their municipality, it's essential to keep records of these payments to ensure eligibility for deductions.

It's important to note that in order to deduct SALT payments, PMI payments, and mortgage interest, you'll need to itemize your deductions. Depending on your location and tax circumstances, itemizing may prove more beneficial than opting for the standard homeowner's tax credit. Make sure to compare the two options before filing your taxes to ensure maximum savings.

Homeowner Exemption

In many states, homeowners can qualify for a homeowner exemption, which can lower their property tax bills. This exemption typically works by reducing the assessed value of the home. Eligibility criteria for homeowner exemptions vary across different jurisdictions, with factors such as age, disability, veteran status, income threshold, and property improvements being taken into account. Generally, using the home as your primary residence is a prerequisite for qualifying for the exemption. To determine whether you're eligible, familiarize yourself with the specific laws and regulations in your state, county, or municipality.

Tax Benefits for Energy-Efficient Upgrades

Although most energy-efficient home upgrades no longer qualify for homeowners tax credits, there's still an opportunity to benefit from the federal Investment Tax Credit if you've installed solar panels. Until 2023, homeowners who installed solar panels between 2017 and 2019 can receive a tax credit equivalent to 30 percent of their costs. Those who installed panels between 2020 and 2022 are eligible for a 26 percent tax credit, while installations in 2023 qualify for a 22 percent tax credit. Take advantage of these incentives to enhance your home's energy efficiency and contribute to a sustainable future.

Deducting Home Office Expenses

Whether you work from home full-time or have a side hustle, you may be eligible for a deduction for the business use of your home. The IRS allows a $5 per square foot deduction for up to 300 square feet of office space, enabling a total deduction of up to $1,500. To qualify for this homeowners tax credit, ensure that your home office is exclusively used for business purposes. Consulting a tax professional can guide on meeting the strict guidelines required for eligibility.


While homeowners insurance and home warranties are essential for protecting your investment, it's important to note that you cannot deduct homeowners insurance or home warranty premiums on your taxes. The Internal Revenue Service (IRS) considers them non-deductible expenses.

Before filing your taxes as a homeowner for the first time, take the opportunity to familiarize yourself with the qualifications for first-time homebuyer tax credits and deductions. Tax breaks for purchasing a house offer numerous advantages at the federal, state, and local levels, making homeownership a wise financial decision.

Furthermore, staying proactive about your home's maintenance by following a yearly checklist can save you money in the long run. Regular upkeep and maintenance help preserve the value of your home while ensuring it remains in optimal condition. Explore resources tailored for first-time homebuyers, such as those offered by Liberty Home Guard, to gain insights beyond filing taxes after purchasing a house. Use our website for a free quote on a policy or call (866)-432-1283. 


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