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How Does Buying a House Affect Taxes in 2023?

By Alene Laney · August 31, 2023 · 6 minute read

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How Does Buying a House Affect Taxes in 2023?

Of all the details that come across your plate when you’re buying a home, one of the questions you might be asking is, “How does buying a house affect taxes?” The short answer? Buying a home could reduce your overall tax liability if you itemize deductions and pay a large amount of mortgage interest.

There are other conditions that need to be met, and it is possible that the amount of taxes you owe will stay the same. Of course, it’s always best to consult with a tax advisor for your individual situation.

To give you a general idea about how buying a home in 2023 affects taxes, we’ve compiled everything you need to know about how tax breaks work, what you can deduct, what you can’t deduct and whether or not it will make sense to itemize deductions.

Does Buying a House Help With Taxes?

It’s possible that buying a house can help with taxes — but only for tax filers who itemize their deductions. In 2020, the most recent year with data available, more than 87% of Americans took the standard deduction rather than itemizing. This signals that it may be unlikely you’ll have enough deductions for itemizing to make sense. Of course, if it can reduce your taxes, it’s worth looking into.

You might also be wondering, “How does buying a house in cash affect taxes?” If you don’t have a mortgage, you’re not paying interest, so you’re not able to take the home mortgage interest deduction. But you’re still able to deduct property taxes if you itemize. Remember to consider this even if your property taxes are part of your mortgage payments.

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How Do Homeowner Tax Breaks Work?

Tax breaks start as programs passed into law and funded by the U.S. Congress. However, it is up to individual homeowners to find and file the correct paperwork to take advantage of these tax breaks.

Tax breaks come to homeowners as either tax credits or tax deductions.

Recommended: First-Time Homebuyer Programs

The Difference Between Tax Deductions and Tax Credits

The difference between a tax deduction and a tax credit is where it lies on IRS form 1040 and how much it reduces your final tax bill or refund. This will make more sense after we explain each.

Deductions On IRS Form 1040, deductions are compiled before being subtracted from your income. This is done before tax is calculated, so having deductions can reduce the overall amount of tax you owe. But because a deduction comes before tax is calculated, the reduction in tax liability is generally less than if the amount of tax owed was directly reduced by a credit (though this depends on the amount of each).

Credits Credits are subtracted from the amount of tax you owe. If you don’t owe tax but are instead receiving a tax refund, credits can increase the amount of money coming your way from the IRS. Generally speaking, credits put more money back in your pocket. You may have heard about a first-time homebuyer tax credit. A bill was introduced in 2021 that would have provided for this benefit, but as of June 2023 it had not passed into law.

Deductions are more common; however, with the revamp of the tax code in 2017 with the Tax Cuts and Jobs Act, the standard deduction was increased substantially and fewer people find the need to itemize. Nevertheless, it’s probably a good idea to add “keep track of possible tax deductions” to your list of New Year’s financial resolutions.

What Are the Standard Deduction Amounts for 2023?

It’s important to know the standard deduction amounts so you know if taking the home mortgage loan interest deduction will make financial sense for you.

•   For single filers: $13,850

•   For head of household: $20,800

•   For married people filing jointly: $27,700

If the amount of mortgage interest you pay is far below the threshold for choosing the standard deduction, you may not be able to find enough deductions for itemizing to make sense. The increased standard deduction in 2017 made this especially true, but there are certain scenarios where you should still itemize deductions.

Recommended: What Is a Gift Tax Return and When Is It Due?

Who Should Itemize Deductions

You should itemize deductions if the amount of your deductions is more than the standard deduction. If you have any of the following situations, you may have enough qualified deductions for itemizing to make sense.

•   If you have large medical or dental expenses that are not paid for by an insurance company

•   If you paid a large amount of interest on your mortgage

•   If you donated large sums to charity

•   If you can claim a disaster or theft loss

•   If you cannot take the standard deduction

•   If you can qualify for large amounts of the “other itemized deductions” found on the IRS forms

It’s hard to say if your individual situation will make sense for itemizing deductions. It may be worth it to consult with a tax professional.

Which Home Expenses Are Tax Deductible?

When you’re looking for home expenses that are tax-deductible, the IRS defines it very narrowly. The costs that are deductible include:

•   State and local real estate property taxes up to $10,000

•   Home equity loan interest if you used the funds from a home equity loan on your property

•   Mortgage interest deduction up to defined limits:

◦   For loans taken out after December 15, 2017: You can deduct home mortgage interest on the first $750,000 of debt (for married couples filing jointly) or the first $375,000 of debt for a married person filing separately.

◦   For loans taken out prior to December 15, 2017: You can deduct home mortgage interest on the first $1,000,000 of debt (for married couples filing jointly) or the first $500,000 for separate filers.

Which Home Expenses Are Not Tax Deductible?

Most home expenses, unfortunately, are not tax deductible. These include things to budget for after buying a home. The IRS specifically outlines these living expenses that cannot be claimed as a deduction:

•   Utility expenses, like gas, water, electricity, garbage, sewer, internet, etc.

•   Home repairs

•   Insurance

•   Homeowners association or condo fees

•   Cost of domestic help

•   Down payment and earnest money

•   Closing costs

•   Depreciation

Potential tax deductions are one thing to factor into your financial considerations as you think about whether you are ready to buy a home, but they certainly aren’t what should be driving your decision to make a purchase.

The Takeaway

It is possible for the amount of tax you owe to be lower after you become a homeowner — but only with certain conditions met. You’ll want to do the math and compare what your taxes will look like when you itemize deductions vs. when you take the standard deduction. That will be the best way to tell how buying a house will affect your taxes.

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FAQ

What is the tax break for buying a house in 2023?

If you itemize deductions on your federal return, you can claim a deduction for your mortgage interest paid on a home bought in 2023, along with state and local taxes paid in 2023.

Will my tax return be higher if I bought a house?

While there are a lot of factors that go into a tax return, generally speaking, if the deductions that come from homeownership reduce your tax liability compared to previous years while all other factors remain the same, then you should owe less (or even get money back).

What are the major tax changes for 2023?

For tax years 2022 and beyond, you can no longer claim mortgage insurance premiums as a deduction. Beyond the tax deductions that come with homeownership, major changes to taxes for 2023 include reduced amounts to the child tax credit, earned income tax credit, and the child and dependent care credit.


Photo credit: iStock/marchmeena29

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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