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Buying your first home is an exhilarating experience that allows you to personalize your space to reflect your unique personality and lifestyle. It also brings a sense of stability and community. However, apart from these emotional benefits, homeownership offers numerous financial advantages and perks. One of the key advantages is the ability to build home equity, leverage borrowing power, and access several tax benefits provided by the government.

To qualify for these tax benefits, you must own and use your home as your primary residence. Here are some deductions you can take advantage of:

  1. Mortgage Interest: At the beginning of your mortgage, the majority of your monthly payment goes towards interest. This means you can deduct a higher amount of interest from your taxes initially, which gradually decreases as you pay down the interest and start paying off the principal. The deductible amount depends on factors such as your principal, interest rate, and income taxes. You can also potentially deduct interest from a home equity loan (HELOC), refinanced loan, line of credit, or home improvement loan, as long as the funds are used to buy, build, or substantially improve your home. However, interest on HELOC or line of credit used for student loans or credit card debt cannot be deducted.
  2. Mortgage Points: You may pay mortgage points to the lender to lower your loan’s interest rate. Each point costs 1 percent of the loan amount. The IRS allows you to deduct the amount paid on points if certain qualifying factors are met. This includes itemizing the amount paid on your loan documents and deducting that amount from your taxes in the year of payment.

Apart from the standard deductions, you can claim the following itemized deductions and credits:

  1. Property Taxes: You can receive a deduction for property taxes on various property types, including your primary residence, vacation home, boat, RV camper, or even a property outside the US. When selling your home, you may also be exempt from paying capital gains tax if certain criteria are met, such as using the property as your primary residence for at least two of the past five years.
  2. Home Office: If you are self-employed and use a portion of your home exclusively for business, you can deduct your home office expenses based on the percentage of your home’s total square footage that the office occupies.
  3. Home Modifications: The cost of home modifications for medical reasons can be deducted from your taxes if the expenses exceed 7.5 percent of your adjusted gross income.

In addition to deductions, there are tax credits that provide a dollar-for-dollar reduction in the taxes you owe:

  1. Mortgage Tax Credit: Some state and local governments issue Mortgage Credit Certificates to new homebuyers through lenders. These certificates allow you to receive a tax credit based on a percentage of the interest paid, with rates varying by state.
  2. Energy Tax Credit: Depending on your state, you may be eligible for tax credits for energy-efficient improvements, such as insulation replacement, energy-efficient doors or windows, and solar panel installation. Additionally, you can receive a credit of up to $1,000 for installing an electric car charging station in your home.

To ensure compliance with tax laws and to determine your eligibility for deductions and credits as a homeowner, it is advisable to seek the guidance of a tax professional.

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