Tax Basics for Homeowners

Apr 19 2022

Your taxes just got a bit more complicated.

One bonus of homeownership, especially early on, is tax breaks. The mortgage interest deduction is the big one, but there are others. Great, right? Yes, but it does make your taxes a little more complicated. If you’ve never been an itemizer, you’ll need to become one if you want those deductions. Maybe that won’t faze you. But if taxes already make you feel like you’re going to lose your mind, it might be time to turn your prep over to a professional!

There’s a chance that, for you, itemizing isn’t worth the trouble — the standard deduction might be better. It depends on your income, whether you’re single or married, what your home cost, and other factors. Even if you’re comfortable with tax-prep software, the first time you file your taxes as a homeowner, you might need a pro to help you make the call.


A New World of Tax Breaks

Get ready to make friends with IRS Schedule A, the form used for itemizing federal tax deductions and credits of all kinds.


Mortgage interest

For new homeowners, this deduction can be significant, because in the first years of your loan, the bulk of your monthly payment is going toward interest, not principal. Check out the amortization schedule you received at closing to see how this shifts over time. (If you didn’t receive one or can’t find it, request a copy from your lender.)

Your mortgage statement’s “current payment due” section shows how much is going to principal, interest, and escrow that month. (See “Know Your Mortgage Statement“.) The figure you need for Schedule A is found on Form 1098, which your loan servicer sends you at the end of the year, every year.


Home equity loan interest

It might be possible to deduct the interest on a home equity loan too. No matter what you used the money for! Check this one with a tax accountant.



Did you pay points to get a better rate on your mortgage? Even if you got the seller to pay them for you, they could be deductible as interest in the year you paid them or on a prorated basis over the life of your mortgage. Points would have been listed in the origination fees on your closing disclosure, and they should also be on Form 1098 from your loan servicer. This is another case where it’s best to check with a tax accountant.


Property taxes

Taxes are a chunk, so this can be another healthy deduction. The first year, you should also deduct any prepaid taxes you might have reimbursed the seller for — this figure was on the closing disclosure.

Two common property tax mistakes:

  • Deducting escrowed taxes instead of actual taxes paid. While property taxes go into your escrow account monthly, as shown in your mortgage statement’s “current payment due” section, you’re not actually paying them. Your loan servicer does that when the bills come out, probably two or four times a year. The amount that was actually paid out is on the annual escrow analysis provided by your servicer.
  • Deducting property taxes for the wrong year. Some cities and towns don’t bill for the year’s taxes until the next year (i.e., 2017 real estate taxes might be due in 2018). The tax year on the bill doesn’t matter to the IRS; it’s when it gets paid.


Mortgage insurance

You can deduct mortgage insurance premiums as interest, although the write-off starts to phase out when your income exceeds $100,000. If you’re married and filing separately, it’s $50,000 (tax year 2016 figures).


Sale of your property

If you sell your home someday, all or most of any profit will be tax free, as long as you lived in your home for two of the previous five years. (There are exceptions, to cut you some slack for unforeseen circumstances … consult a tax accountant.) On the other hand, a loss is not usually deductible.


Energy credits

Energy-saving home improvements can mean a tax credit of up to $500 (2016). What qualifies for a credit is always changing, but think efficient doors and windows, insulation systems, heating equipment …. Unlike a tax deduction, which cuts your tax bill indirectly by reducing your gross income, a tax credit comes right off the top. Nice! There’s a separate, larger credit for big-ticket items like solar panels. Visit the IRS credits and deductions page for a current list of credits.


About that home office

People often stretch the definition of “home office,” so this deduction can trigger an audit. See IRS publication 587, “Business Use of Your Home,” to get the details on what qualifies.


What’s Not Deductible?

While you don’t want to miss out on any deductions, it’s also important to make sure you don’t claim anything you shouldn’t. Here are some home-related expenses that aren’t deductible:

  • Homeowners insurance
  • Mortgage insurance if your income is more than about $100,000 (2016)
  • Dues to a homeowners association
  • Appraisal fees
  • Repairs and improvements, except those required for medical care or accessibility, and certain energy-savers (see “Energy Credits,” above)

Tip: Keep good records on all repairs and improvements. Including landscaping. Most profit from the sale of a residence is already tax-free. But if you own your home for a long time in a strong market (or if the law changes), it could appreciate beyond the limit. By establishing a higher cost-basis for your home, you might reduce the amount of profit that counts as taxable.


Ready for a Tax Preparer?

Buying a home is among the big life changes that can complicate your taxes. Many homeowners do just fine with tax prep software like TurboTax, H&R Block, and TaxAct. Especially if the end-of-year documents involved are limited to a W2 and a 1098 (that’s your mortgage interest statement). But for some of us, it’s time to a hire a pro. You might also want to hire a pro this year if you …

  • Became self-employed
  • Got married or divorced
  • Had a baby or adopted
  • Lived or worked in more than one state
  • Found mistakes on a previous return
  • Inherited
  • Have any foreign assets


Tax Preparer vs Accountant

The first thing to know is that tax preparers and accountants aren’t the same thing. Accountants have a formal degree in their field, usually at least a bachelor’s, but still, they might not be tax experts. As for tax preparers, anyone who passes the IRS exam and has a preparer tax identification number (PTIN) can do a tax return for a client; no other training is required. Learn more about the differences here.

While a PTIN is the bare minimum, it’s probably fair to say that the ultimate tax preparer is a certified public accountant (CPA) who is also trained in tax prep. But your needs don’t necessarily call for that expense.


Tips for Choosing a Tax Preparer

You might be surprised to learn (we were) that in most states, tax preparers are unregulated.  And the US Government Accountability Office did a small undercover study a few years ago in which almost all the paid preparers made mistakes! That might say as much about the challenges of the tax code as it does about the tax prep profession … but still.

The point is, choose carefully. Remember that there’s more riding on your choice of preparer than your refund: you’re the one who’s ultimately responsible for the accuracy of your tax return, and for any fines that mistakes could earn you.

BTW, itemized tax prep costs an average of about $275, depending on what region you live in and how gnarly your state’s tax code is.


Shop around

Here are some links for understanding the world of tax preparers and screening out duds.

“Choose Your Tax Preparer Wisely”
Tips from the IRS. You’ll find links to their own article explaining the various titles and credentials you’ll run across (dry as heck but informative), and to their searchable database of preparers who hold recognized credentials.

“10 Tips for Hiring a Tax Preparer”
From the American Institute of CPAs.

“11 Questions to Ask When Hiring a Tax Preparer”
Courtesy of


Six red flags

Our homeownership advisors see a lot of “basement preparers” engaged in straight-up fraud. They doctor returns with fake education credits, inflated income, and more.

Stay away from preparers who . . .

  1. Claim they’ll get you a bigger refund than the other guy
  2. Base their fee on a percentage of your refund
  3. Ask you to sign a blank tax form
  4. Don’t offer e-filing, which is the security standard today
  5. Imply IRS endorsement — the IRS doesn’t do that
  6. Aren’t available to you when tax season is over


Get the most for your money

Keep good, organized records. That way, your tax preparer will have the information he or she needs to file an accurate return, get you the biggest possible refund, and get the job done faster, at the lowest cost to you.


Don’t Be Afraid of the IRS

Turning to the IRS for help at tax time might not be your first instinct. Think again!


Help and accurate info is easy to navigate if you have questions, has every form you could possibly need, alerts you to scams, and more. The agency even has good over-the-phone customer service.


Free tax prep!

The IRS’s Volunteer Income Tax Assistance (VITA) program offers free, in-person basic tax return prep if you make $54,000 or less, have disabilities, or speak limited English.

VITA volunteers go through a rigorous IRS certification process, so you won’t have to worry about their competency. Plus, many VITA sites are nonprofit housing agencies. Bonus: alongside tax prep, VITA programs frequently offer general financial counseling if you want it.



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