What First-Time Homebuyers Need to Know Before Tax Filing

1.23.2025 | Category: Article

For first-time homebuyers, the path to homeownership is filled with excitement and challenges. One often-overlooked aspect of this journey is how purchasing a home can impact their taxes.

As tax season approaches, first-time buyers should be aware of several important tax deductions and strategies to maximize their refund — a refund that could help fuel their next steps in homeownership, whether it’s making upgrades or saving for future investments.

As a real estate agent, understanding these tax implications not only helps you assist clients in managing their finances more effectively but also positions you as a knowledgeable partner in their homebuying and homeownership journey. Let’s take a closer look at what first-time homebuyers and homeowners need to know before filing their taxes, including common tax breaks available and tips for maximizing their return.

Mortgage Interest Deduction: A Game Changer for New Homeowners

One of the most significant tax benefits for homeowners, especially first-time buyers, is the mortgage interest deduction. When you own a home, a portion of your mortgage payment goes toward interest, and this can be deducted from your taxable income. In the early years of homeownership, a larger percentage of the monthly mortgage payment typically goes toward interest rather than principal, making the mortgage interest deduction particularly valuable for first-time homeowners.

This deduction can significantly reduce a buyer’s tax liability, potentially resulting in a larger refund. For example, if a homeowner paid $10,000 in mortgage interest over the year, they could deduct that amount from their taxable income, lowering the amount they owe in taxes.

Real estate agents should advise clients to keep detailed records of their mortgage payments, including the breakdown of principal and interest, which is provided on the annual mortgage statement (Form 1098). By understanding this deduction, first-time homeowners can take full advantage of the tax relief it offers.

Property Tax Deductions: Saving on State and Local Taxes

Another important tax break for homeowners is the ability to deduct property taxes. Property taxes are typically assessed by local governments and can be substantial, especially in high-tax areas. First-time homeowners can deduct these taxes on their federal income tax returns, up to a certain limit, as part of the itemized deductions.

Real estate agents should remind first-time buyers that they can claim property tax deductions for taxes they paid within the tax year. Whether the taxes are paid directly through the mortgage lender’s escrow account or paid out-of-pocket, it’s essential to ensure that all eligible taxes are documented and included on the tax return.

In addition to reducing the taxable income, this deduction can lead to a more favorable refund. It's crucial for first-time buyers to track property tax payments throughout the year, as these deductions can be easily overlooked.

First-Time Homebuyer Credit: What to Know

Though the First-Time Homebuyer Tax Credit was phased out after 2010, many first-time buyers are still eligible for other programs and credits that provide similar benefits. Some states offer their own first-time homebuyer programs, such as down payment assistance or state-level tax credits, which could reduce the overall financial burden of purchasing a home.

For instance, some states offer tax credits for first-time homebuyers that can be used to offset the costs of closing or home purchase. These programs vary from state to state, and real estate agents should be familiar with the options available in their region. By guiding clients to take full advantage of any state-specific programs, agents can provide additional value and support throughout the homebuying process.

Home Office Deductions for Self-Employed Buyers

For first-time homebuyers who work from home or are self-employed, there may be additional tax savings available through the home office deduction. The IRS allows homeowners to deduct certain expenses related to their home office, including utilities, internet, and even part of their mortgage interest and property taxes.

To qualify for the home office deduction, the space must be used exclusively for business purposes. The deduction is generally calculated either through the simplified method (a flat rate per square foot) or the regular method (which allows for actual expenses, such as a percentage of the home’s total square footage).

If your clients are self-employed, this is an excellent opportunity to help them identify areas where they could reduce their taxable income. A home office deduction can provide substantial tax relief, which might be especially beneficial for first-time buyers who are still adjusting to the financial responsibilities of homeownership.

Maximizing Your Refund: Tips for First-Time Buyers

Maximizing a tax refund isn’t just about claiming all available deductions. There are several strategies first-time buyers can use to boost their refund, ultimately helping them reinvest in their homebuying journey. Here are a few tips:

• Adjust Tax Withholding: First-time buyers who received a large refund in the previous year may want to consider adjusting their tax withholding throughout the year. This means less money will be withheld from each paycheck, and they’ll have more disposable income to save for their next goal — such as making home improvements or contributing to their emergency fund.

• Contribute to Retirement Accounts: Making contributions to retirement accounts such as an IRA or 401(k) can reduce taxable income, leading to a larger refund. For first-time buyers, this may be an ideal way to save for future financial goals while also reducing their tax liability.

• Track Other Deductions: Homeowners often overlook other eligible deductions, such as charitable donations or medical expenses. First-time buyers should keep detailed records of any expenses that could contribute to a higher refund.

The Importance of Professional Tax Advice

While understanding basic deductions is crucial, real estate agents should also encourage first-time buyers to consult with a tax professional. A tax advisor can help ensure they are taking advantage of all available credits and deductions, as well as provide tailored advice for their specific financial situation.

By referring clients to tax experts who specialize in real estate and homeownership, agents can enhance their value and ensure that first-time buyers are well-equipped to manage their new financial responsibilities.

Tax season offers first-time homebuyers a unique opportunity to gain insight into their financial health and maximize their refund. By understanding key deductions such as mortgage interest, property taxes, and the home office deduction, as well as utilizing strategies to boost their refund, first-time buyers can make the most of their tax filing. Real estate agents who help guide clients through this process can not only enhance their service but also support buyers in achieving their long-term financial goals.