Becoming a homeowner can change your life -- and your taxes. Once you close on the house, you're going to have an entirely new set of deductions for years to come. To claim most of them, you'll have to itemize tax deductions. If you take the standard deduction instead, you don't get most deductions related to home ownership.
Points are prepaid interest included in the closing costs. In return for paying up front, you pay less interest over the life of the loan. If you're buying your primary personal residence and your mortgage debt is under $1 million, points are usually deductible the year you pay them. If they're unusually high or the mortgage is on a vacation home, you have to deduct them over the life of the loan. Some lenders use "points" to refer to other closing costs, but you can't deduct them --- you can deduct only those points that truly represent mortgage interest.
If you put less than 20 percent down on the house, your lender probably requires you to buy mortgage insurance. This reimburses the lender if you default on the loan. Mortgage insurance premiums are an itemized tax deduction, and this includes the premiums you pay in the first year of home ownership. If you take out a mortgage backed by the Federal Housing Administration, the FHA requires mortgage insurance, including an initial premium at closing. That initial premium is also deductible.
You can deduct property taxes assessed on the value of your house. Other taxes, used to pay for street lights and other improvements near you, are not deductible. The year you close, you have to prorate them: you claim the taxes for the part of the year after you close, and the seller deducts the rest. Even if the seller already paid the bill, you're entitled to the write-off for the period you own the house.
If you pay sales tax when you close, that's deductible. Taxes on the transfer of ownership -- transfer, doc or stamp taxes -- are not considered sales tax and are therefore not deductible. You can, however, count them as part of your adjusted basis. The basis is your purchase price, adjusted for closing costs including such items as doc taxes, legal fees, deed-recording fees and your title insurance policy. When you sell the house, you subtract the adjusted basis from the sales price to determine capital gains. The more fees you add to the basis, the less taxable gain you have.
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