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Tea & Tax Talk

I Purchased My 1st Home... Now What?!

POV: You’ve recently closed on your first home (Congratulations!). For as long as you can remember, people have told you that once you own a home, you’ll want to itemize deductions versus taking the standard deduction. You don’t know which receipts to save, or which purchases to track, so you’re stuffing them all in a shoebox or in a file cabinet in your basement. If this sounds like you, you’re not alone. Let’s talk through how homeownership impacts your taxes. For the purposes of this blog, we’ll assume that this is your primary residence.



According to the IRS, your home could be a house, condo, cooperative apartment, houseboat, mobile home or even a house trailer (so long as it contains a sleeping space, toilet, and cooking facilities).

HERE’S WHAT YOU CAN DEDUCT:

As a homeowner of a single-family residence, you’re able to deduct:

  • Home mortgage interest (within allowable limits)

  • Property taxes (which are included in state and local taxes) – in total, the deduction is limited to a $10,000 limit. This deduction is further limited (to $5,000) if your filing status is married filing separately.

  • Mortgage insurance premiums (but as of October 2022, this deduction was only extended through 2021)

In order to deduct these homeownership expenses, you must itemize deductions versus taking the standard deduction. You can only itemize OR take the standard deduction, so generally speaking, you should elect to take the higher of the two deductions since the goal is to reduce your taxable income by as much as possible in order to reduce your tax bill.

Pro Tip: To maximize the itemized deduction, be sure to provide your accountant with your HUD-1 statement which was provided to you at closing, which will show if you prepaid any property taxes as part of your settlement costs.This is only necessary for the 1st year you’re filing your taxes as a new homeowner. If you have not yet reached the $10,000 Federal state and local tax limit, these additional taxes can increase the itemized deduction. Furthermore, if you’re in a state like NJ, the property tax deduction limit is $15,000, so you want to maximize the deduction there as well.

HERE’S WHAT YOU CAN NOT DEDUCT:

Now that we’ve covered what is tax-deductible, let’s look at what can’t be deducted:

  • Down payment

  • Forfeited down payments, deposits, or earnest money

  • Insurance, like homeowner’s insurance, hazard insurance, comprehensive coverage, fire coverage, title insurance, etc.

  • Utilities, like electricity, gas, water, sewer, security, internet, etc.

  • Homeowners’ association (HOA) fees, condo association fees, common charges, etc.

  • Settlement and closing costs (excluding prepaid interest and prepaid property taxes)

  • Home Repairs

  • Money paid for the cleaning and maintenance of your home

  • Depreciation


HERE’S WHAT YOU SHOULD KEEP TRACK OF EVEN THOUGH YOU CAN’T DEDUCT IT:

Although improvements to your primary residence are not tax-deductible and cannot be depreciated, you’ll still want to track these expenses. In the event you sell your home or convert it from personal use to rental use, basis adjustments may be necessary. If you sell your home, these basis adjustments will be helpful in reducing any potential taxable gain on the sale. If you convert the home from personal to rental use, the basis that will be used for depreciation will be the lesser of the fair market value or the adjusted basis on the date that it’s converted.


Here are some fees and improvements that can be used to adjust your basis:

  • Settlement fees and closing costs such as

  • Abstract fees

  • Charges for installing utility services

  • Legal fees (including fees for the title search and preparing the sales contract and deed)

  • Recording fees

  • Survey fees

  • Transfer or stamp taxes

  • Owner’s title insurance

  • Costs owed by the seller that you paid (as long as the seller doesn’t reimburse you) such as real estate taxes owed up to the day before the sale date, back interest owed by the seller, seller’s title recording or mortgage fees, charges for improvements or repairs that are the seller’s responsibility, and sales commissions.

  • Improvements, such as:

  • Additions (i.e. bedroom, bathroom, deck, garage, porch and patio)

  • Lawn & Gr