State, federal tax benefits for homeowners

The ink has dried and keys have been exchanged. Your real estate agent snapped a few pictures for social media, commemorating the day you became a homeowner.

If you’re like most Americans, your home is now your largest asset. And while that comes with great responsibility, it also comes with some perks. Among those perks are the myriad tax benefits Uncle Sam has made available to homeowners, and here we will explore many of them.

  • Mortgage Interest Deduction

    Taxpayers who own their own home may deduct the interest paid toward their mortgage loan from their total income earned when it comes time to pay income taxes in April. The IRS says you can claim this deduction for a primary residence as well as a secondary residence such as a vacation home, provided you spend at least a few weeks out of the year at the secondary home.

    Points paid to lower home mortgage interest rate

    Some homebuyers and borrowers opt to pay “points” up front when obtaining a mortgage loan to lower the cost of their interest rate over the course of the loan. Each point is typically equal to 1% of the principal loan amount. The IRS says home mortgage points as prepaid interest, and therefore in most cases considers them tax deductible. Points paid on a home improvement loan, such as a home equity line of credit (HELOC) are also potentially tax deductible.

    Interest paid on home improvement loans, i.e., HELOC

    If you took out a home improvement loan to build or make improvements to your home, the interest may be tax deductible the IRS says, under the same guidelines as the mortgage interest deduction. It’s worth noting that to qualify for the full deduction the home interest benefit offers, the total amount of debt on all outstanding loans must be $1 million or less.

    Private Mortgage Insurance

    It’s common for homebuyers who put down less than 20% as a down payment to have to pay some kind of insurance policy on their mortgage loan. Amounts paid as mortgage insurance may be counted as home mortgage interest, the IRS says, which means private mortgage insurance (PMI) – also known as a "funding fee" for Veterans Affairs loans and "mortgage insurance premium" for FHA loans – may be tax deductible each year.

    Income / Interest on Reverse Mortgage

    A reverse mortgage is a loan product available for homeowners who are 62 years of age or older that allows them to convert the equity in their homes into cash. It’s called a reverse mortgage because the lender pays out the homeowner’s accrued equity each month rather than the homeowner paying a mortgage payment.

    The homeowners get to keep the title to their home and are not required to pay back the loan until they move, sell, reach the end of a pre-determined loan-period or die. At that time, the reverse mortgage would be due with interest.

    Because reverse mortgages are considered loan advances and not income, proceeds received from a reverse mortgage are not taxable, the IRS. Any interest accrued on the reverse mortgage is not tax deductible until it is paid.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Homestead Tax Deduction

    The District’s Homestead Deduction allows homeowners to reduce the value of their property’s assessed value by $71,700 when computing their yearly tax liability, under the DC's Office of Tax and Revenue’s current guidelines.

    At Federal Title, your closing agent or attorney will assist with filing the necessary paperwork. You must file a properly completed DC Homestead Deduction application with the OTC and be able to demonstrate the property is 1) your principal residence and 2) the property is owner-occupied and contains no more than five dwelling units (including the unit occupied by the owner).

    Read more about the DC Homestead Tax Deduction

    Senior Citizen Deduction

    This is an important tax benefit to be aware of not only for senior citizens living in the District of Columbia, but also for the buyers of homes that were previously owned by senior citizens because it can give the potential buyer / would-be owner a false sense of the annual real property tax assessment.

    Property owners aged 65 and older (as well as District residents who can claim disability) may file an application for senior citizen and disabled property owner tax relief. This benefit reduces the qualified property owner’s real property tax liability by 50%. Income restrictions may apply in addition to the criteria that must be satisfied to qualify for the DC Homestead Deduction.

    When searching for homes and condos online, it’s common for websites like Redfin, Zillow, Homesnap and Trulia to list the previous year’s real property tax assessment. However, it doesn’t necessarily indicate if the previous owner qualified for any kinds of tax benefits that may have significantly lowered the liability compared to what a new owner would be liable for.

    DC Tax Abatement

    The District’s tax abatement program was designed by the local government to help lower income residents purchase property. Homebuyers who qualify for DC Tax Abatement are exempt from paying recordation tax at settlement. What’s more, they are also exempt from paying property taxes for the first 5 years they live in the home, beginning the next full tax year.

    For those who were unaware of the DC Tax Abatement program when they purchased their homes, it’s possible to apply for this tax benefit up to three years from the original purchase date. You will still need the meet the guidelines and supply proper documentation; however if you in fact qualify you may be entitled to a refund of part of the recordation tax paid at settlement.

    Purchase price and income restrictions apply – and they change from time to time – so check in with the DC Office of Tax Revenue or ask your Federal Title closing agent for the latest information.

    Read more on DC Tax Abatement.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Homestead Tax Credit

    The Maryland Homestead Tax Credit operates to limit how much your property taxes can go up each year, if you live in the property as a principal residence. A homeowner pays no property tax on the amount of any increase of the assessed value that is above a cap. The Homestead Percent Caps for Maryland jurisdictions are listed on the website of the Maryland Department of Assessments and Taxation.

    In Maryland, if you meet the requirements and file an application, you may receive a discount on your real property taxes. To qualify you must 1) live in the property as your principal residence, 2) have been in the property as your principal residence for at least a year and 3) submit an application to the MD DAT.

    When you purchase your property, a document is typically filed with the deed stating you will be living in the property as your principal residence – each County has its own form. Once the Assessor’s Office for the County in which you purchased updates the assessor’s records to reflect you as the new owner, an Application for Homestead Tax Credit Eligibility is sent to your property.

    If you do not get an application via mail, you can download a Homestead Tax Credit application off the Maryland government website, fill it out and mail it in. Unlike other tax credits and exemptions, you need only apply once as opposed to every year.

    Read more about the Maryland Homestead Tax Credit.

    Homeowners Property Tax Credit

    This tax credit that offers relief for lower income homeowners sets a limit on the amount of property taxes any homeowner must pay based upon his or her income. Applicants must report total income – gross income before any deductions are taken – and the homeowner must provide documentation of all income sources, including non-taxable retirement benefits like Social Security and pensions, according to the Maryland Dept. of Assessments and Taxation. To qualify a homeowner’s net worth must not exceed $200,000 while the gross household income must not exceed $60,000 annually.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Mortgage Certificate Program

    This is a relatively new program for first-time homebuyers offered by the Virginia Housing Development Authority. The credit matches dollar-for-dollar 20 % of the total mortgage interest paid by the homebuyer each year, thus reducing the amount of federal income tax they owe. The remaining 80 % of the total mortgage interest paid that year remains eligible for a tax deduction.

    Like most of the tax benefits mentioned in this article, the Mortgage Credit Corticated program comes with income and purchase price limitations. Those amounts vary depending on where the house is located. In the DC metro area, the limits are $121,900 for households of two or less and $142,300 for households of three or more, while the purchase price limit is $500,000.

    Further, with this program a homeowner who sells his or her property in the first nine years of homeownership may subject to a federal recapture tax.

    Livable Home Tax Credit

    The Virginia Department of Housing and Community Development administers this $5,000 income tax credit that offers tax relief to individuals and corporations who purchase a new accessible residence and a credit of 50 % of the cost of improvements up to $5,000 to retrofit an existing property.

    Like most of the tax benefits mentioned in this article, the Mortgage Credit Corticated program comes with income and purchase price limitations. Those amounts vary depending on where the house is located. In the DC metro area, the limits are $121,900 for households of two or less and $142,300 for households of three or more, while the purchase price limit is $500,000.

    Further, with this program a homeowner who sells his or her property in the first nine years of homeownership may subject to a federal recapture tax.

    For a new residential unit to qualify, an applicant must be able to demonstrate the residence includes three features of “Universal Visitability” or include at least three accessibility features such as a zero-step entrance, doors with a minimum of 34 inches of clear width and hallways that are a minimum of 36 inches of clear width, according to the latest application guidelines.

    For a retrofitted unit to qualify, an applicant must be able to demonstrate improvements included at least one accessibility feature.

    Historic Rehabilitation Tax Credit

    Those who choose to purchase and rehab a historical property in Virginia may be eligible for a rehabilitation tax credit aimed at preserving the state’s historic homes. The credit is equal to 25 % of the rehabilitation expenses, while the work must also be certified by the Virginia Department of Historic Resources. The cost of the rehab project must be equal to a least half of the residence’s assessed value or 25 % if the residence is owner-occupied.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936
  • Office In-Home Tax Deduction

    Technically this would be a business expense tax deduction, but if you use a portion of your home as a home office, you may qualify for an Office In-Home tax deduction.

    To qualify for this benefit, the IRS says a taxpayer must use a specific area of his or her home strictly for business, although the space does not need to be marked off with a permanent partition.

    These Items are NOT Tax Deductible

    Most closing costs – title fees, home inspection fees, home warranties, real estate commissions and most other expenses related to the closing process are most likely not tax deductible. Only the items mentioned above are eligible for a tax write-off.

    Home improvements – costs associated with home improvements (outside of interest paid on a home improvement loan) are not tax deductible, but there is a silver lining. Since many home improvements add to the value of a home, it’s possible you could sell your property for more money down the road and recoup your investment.

    Transfer / Recordation taxes – these taxes are traditionally split by the homebuyer and seller in the DC metro area and are dependent on the sales price of the property. While they are not deductible, the IRS says buyers can include them in the cost basis of the property and sellers can reduce the amount realized on the sale.

    For Your Friends Who Are Still Renters...

    The District of Columbia and Maryland offer a tax deduction for renters to offset costs landlords add to their rental rates to pay their tax-deductible property taxes. Both credits come with income and other restrictions, but renters could get back as much as $1,000. Virginia does not currently offer a tax deduction for renters.

    Taking advantage of the renter tax credit is one way renters may be able to save toward a down payment on a house.

    This article is for general information purposes only. Consult your tax professional. For further reading, consult IRS Publication 503 and IRS Publication 936

Did we miss anything?

Tax credits and deductions for homebuyers and homeowners are constantly changing, so please let us know if we missed one of your favorites or if you have another one to add to our list.

What’s the status on B21-0417, aka The First-time Homebuyer Tax Benefit Amendment Act of 2015?

Legislation that would offer tax relief for District residents buying DC real estate is currently under committee review and awaiting scheduling for a mark-up, a spokeswoman for the Council's Committee on Finance and Revenue said.

Known as the First-time Homebuyer Tax Benefit Amendment Act of 2015 (B21-0417), the bill would create a new transfer tax rate of 0.725% for homebuyers who have never purchased a house, condo or share in a cooperative unit in the District. It would go into effect Sept. 30, 2016.

During mark-up, which is a vote in the Committee to send the bill before the whole Council, the Committee will have an opportunity to amend the bill (or not) and will also have a chance to review a financial impact statement to analyze costs and revenues of the proposed legislation.

If the bill passes mark-up, it will go to Mayor Muriel Bowser for a signature before going to Congress for review and passive approval. If it fails mark-up, the bill will get kicked to the Committee of the Whole and added to the agenda for the next legislative meeting.

Impact on low- to moderate-income residents a concern

The Council held a public hearing about the bill on February 10 of this year, which is when Settlement Observer picked up on the story. Then on February 24 a representative from the DC Fiscal Policy Institute testified before the Committee about concerns regarding a lack of income restrictions and the impact the tax cut would have on the city’s Housing Production Trust Fund.

“Rather than provide a new tax benefit for all first-time homebuyers, DCFPI recommends that policymakers review the city’s current deed tax assistance to low- and moderate-income homebuyers and make adjustments if they appear warranted,” said DCFPI Housing Policy Associate Claire Zippel in her testimony.

The bill was introduced last October by councilmembers Jack Evans (D-Ward 2), David Grosso (I-At Large) and Anita Bonds (D-At Large).

Grosso acknowledged concerns regarding the economic impact of lowering the transfer tax rate across the board and, in particular, how such a deduction would affect the Trust Fund.

“I am committed to working with my colleagues to ensure that the [Trust Fund] receives annual commitments so that it is not dependent on yearly fluctuations in recordation tax revenues,” Grosso said in a statement.

Mayor Bowser’s budget proposal last year included $100 million for the Trust Fund in fiscal year 2016, according to the website of the Coalition for Nonprofit Housing & Economic Development. The Trust Fund is administered by the DC Department of Housing and Community Development with support from the Coalition.

The Trust Fund “enables non-profit housing providers, mission-driven for-profit developers and renters wishing to exercise their Tenant Opportunity to Purchase rights to improve and develop affordable housing in all eight wards,” according to the Coalition’s website.

Since its inception in 2002, The Trust Fund has produced or preserved more than 8,000 affordable homes with upward of 2,000 more in the pipeline, according to the Coalition’s website. In addition the Trust Fund has created an estimated 10,000 short-term and permanent jobs and has helped more than 18,000 DC residents.

The District's homebuying taxes significantly higher than Maryland or Virginia, about 50% higher on average

Current DC transfer and recordation taxes are on average 50% higher than neighboring Maryland and Virginia, Grosso said in a statement, which was the impetus for introducing a bill that would lower the tax burden for homebuyers purchasing for the first time in the District.

Transfer tax rates for District properties vary depending on the purchase price, from 1.1% for purchases $399,999 and below to 1.45% for purchases of $400,000 or more. The tax payment is traditionally paid by both the buyer and seller.

The DC tax abatement program offers relief for some, but homebuyers must satisfy income, purchase price and other restrictions and provide documentation to qualify.

Tax abatement waives the recordation tax obligation for low- to moderate-income first-time homebuyers while also crediting the seller’s portion of the tax to the homebuyer, resulting in a 2.2% swing in favor of the homebuyer. In addition, a qualifying homebuyer is exempt from paying property taxes for the first five years of ownership, but again some restrictions apply.

“If policymakers are concerned that the current deed tax assistance programs are inadequate, the District should look to modify existing programs while keeping a focus on low- and moderate-income families, rather than adopt another tax break that has no income targeting,” Zippel, the housing policy associate, said in her testimony.

We will continue to monitor the story, and readers can also follow along on the Council's website.

Income, purchase price limits for DC Tax Abatement increase

Income, purchase price limits for DC Tax Abatement increase

The purchase price and qualifying income limits for the District of Columbia's popular tax abatement program have gone up, according to the Office of Tax and Revenue, which should be good news for local homebuyers who have seen median home prices soar over $500,000 in recent months.

Under the latest guidelines, purchase price may not exceed $408,000. Somewhere in the neighborhood of 400 homes are currently on the market in Washington, DC at a list price that meets the purchase price qualification for DC Tax Abatement, based on a quick search on Home Snap.

Limits on household income, the other major qualifying factor for DC Tax Abatement, also increased. Review the income qualification table below:

Persons in household
Household income limits

For those who haven't stopped by in a while, we recently revamped our page on the DC Tax Abatement program. There we answer several commonly asked questions about the program and address some of the finer points on qualification criteria. The topic of household income, for example, is a popular one.

The DC Tax Abatement program is one of our favorite topics to write about. Check out our collection of articles on DC Tax Abatement to learn more about how the program works and how to qualify.

New thresholds for DC Tax Abatement

Purchase price and income thresholds to qualify for the popular DC Tax Abatement Program have increased, hopefully making it easier for more homebuyers to become homeowners.
The numbers in this article may be out of date. Visit our guide how to qualify for DC Tax Abatement for the most current information.

The District of Columbia Office of Tax and Revenue upped the purchase price threshold to $375,200 from $367,200.

At the same time, the income threshold for a single buyer increased to $57,540 from $56,100 while the income threshold for a two-person household increased to $65,760 from $64,080.

In "Economic Development Zones," the income limits are higher. For a single buyer, it's $65,890 and for a couple it's $75,350.

For more on income limitations and the DC Tax Abatement Program, please visit our page on the DC Tax Abatement Program.

The most recent data, which is for October, shows a $400,000 median sales price in the District, the highest October-level in nine years. The October median sales price was 2.6 percent higher than September and 5.3 percent higher than the previous year.

The DC Tax Abatement Program provides an exemption from the DC 1.1% Recordation Tax and an allowable credit from your seller(s) of 1.1% equal to the DC Transfer Tax. Additionally, the program provides a five-year real estate tax abatement that begins October 1 following your date of closing.

Lenders, be careful when calculating income for D.C. Tax Abatement

The D.C. Tax Abatement Program is a great program for those homebuyers who qualify. Qualifying homebuyers are exempt from paying transfer and recordation taxes at closing and will also be exempt from paying real property taxes for 5 years beginning the next full tax year after filing. It is understandable that lenders want their clients to qualify for the program wherever possible.

One of the key qualifications is income. The household must have an income under a certain limit.

Often, lenders will use the income they have calculated for their client for underwriting purposes as a basis for determining whether their client will qualify for the Tax Abatement Program. Lenders will usually take a conservative approach when calculating income for underwriting purposes, because this approach reduces their risk.

Lenders need to be aware that the D.C. government will do its own, independent calculation of income (looking at tax returns and W-2’s for the past two years as well as the applicant’s last two pay stubs) when determining an applicant’s qualification for the Tax Abatement Program. D.C.’s approach may not be as conservative as the lender’s.

We have seen some cases recently where the lender’s determination of income for underwriting purposes was low enough for a homebuyer to qualify for the Tax Abatement Program, but when the D.C. government did its own calculation, the homebuyer did not qualify.

If lenders have any questions about Tax Abatement income qualifications, they should ask the title company.

  • Ways to save at closing

    Title charges are the largest chunk of closing costs and can vary by hundreds of dollars.

    Learn more

  • What are closing costs?

    The real estate closing process involves loan steps, legal steps and title steps.

    Learn more

  • What's title insurance?

    Insure your legal ownership just like you'd insure the building, but for lots cheaper.

    Learn more

Connect with us

Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.