From property taxes to upgrades and maintenance, the costs of buying and owning a home can add up quickly. Fortunately, some of these expenses can help reduce your taxes. There are several tax benefits available to homeowners if they know where to look. Below, we will explain each of these deductions and deductions to help you better understand how they reduce your overall tax burden.
Before proceeding, keep in mind that you must itemize your deductions to take advantage of these tax breaks. These do not apply if you choose the basic deduction.
1. Tax credits for efficient home upgrades
Home improvement projects can improve the safety and functionality of your living space, but they can also have tax benefits. Home upgrades that make your home more energy efficient can earn you up to $3,200 in tax credits. Energy-efficient home upgrades like exterior doors and skylights include up to $1,200 in credits, and the remaining $2,000 counts toward things like certified heat pumps and water heaters. This is a tax credit (not a credit), so it directly reduces the amount of tax you owe.
2. Mortgage interest tax reduction
If you choose to itemize your deductions, you can reduce your taxable income by deducting interest from your mortgage payment. Your total interest payments for the year will appear on your Form 1098. Married couples filing jointly can deduct interest on the first $750,000 of the home’s value. If the home was purchased before 2017, the limit is $1 million. This deduction reduces your taxable income and may reduce your tax liability.
3. Property tax deduction
Homeowners are allowed to deduct property taxes on their federal returns. Couples filing jointly can deduct up to $10,000 and those filing separately can deduct $5,000. This is especially beneficial in states like New York and New Jersey, which pay the highest property taxes in the nation. Note that this falls under the SALT (state and local tax) deduction cap.
4. Home Equity Loan or HELOC Deduction
Home equity loans and home equity lines of credit (HELOCs) are both financing options that are secured by the equity you’ve built up in your home. Similar to mortgage interest, the IRS allows you to deduct interest paid from these. However, this deduction only applies if the funds are used to purchase, construct, or significantly improve the home securing the loan. This deduction also applies to the first $750,000 of your mortgage. If you qualify, you can reduce your taxable income.
5. Home office tax relief
If you are self-employed and work from home, you can use a home office to lower your taxes. As long as you meet IRS requirements, you can use your home office to deduct utilities, insurance, and property taxes based on the percentage of your home’s square footage that your office occupies.
For example, if your office takes up 6% of your home’s square footage, you can deduct 6%.
Please note that to qualify for this tax break, your office must meet the following requirements:
Be used regularly and exclusively for business purposes Be your principal place of business
6. Discount points (mortgage points)
Home buyers can purchase discount points or mortgage points to lower the interest rate they pay on their mortgage. But the benefits don’t stop there; purchasing discount points can also provide buyers with some tax relief. According to the IRS, homeowners can only claim this deduction under certain conditions. Points are often deducted in the year they are paid, but some points may need to be deducted over the life of the loan.
7. Capital gains deduction
When most people think of capital gains, they think of stocks and investments, but it also applies to the sale of a home. If you sell your primary residence, you may be able to exclude up to $250,000 of capital gains from your taxable income ($500,000 for married couples filing jointly) if you meet IRS ownership and use requirements. The amount of tax you pay depends on how long you’ve owned the property and your overall profits. This exclusion can significantly reduce or even eliminate capital gains taxes.
8. Rental real estate deduction
Homeowner tax breaks aren’t just available for your primary residence. If you own a rental property, you can deduct expenses such as property taxes, mortgage interest, utilities, maintenance, and repairs. If you rent out part of your home, you can deduct a pro rata portion of these costs based on the space you rent out. These deductions help offset your rental income and reduce your taxable income.
Understanding these tax breaks can help you make the most of your homeownership come tax time. Because tax rules are subject to change and individual circumstances vary, we recommend that you consult a tax professional to help you make the most of the benefits available to you.
Frequently asked questions about tax relief for homeowners
What housing expenses are not deductible?
You can use some of your housing costs to lower your taxes, but not all of them meet the requirements. Expenses that cannot be included in taxable income include:
Homeowner’s insurance premium Mortgage principal payment Depreciation (main residence) Down payment
Are there tax breaks for new homeowners?
Although tax breaks are limited, especially for first-time homebuyers, there are still some potential benefits. For example, most people have to pay a 10% penalty for early withdrawals from a Roth IRA, but first-time homebuyers under age 59 1/2 can withdraw up to $10,000 penalty-free to purchase a home.
Are homeowners with disabilities eligible for additional tax benefits?
There are a variety of deductions available to people with disabilities and parents of children with disabilities. For example, legally blind homeowners can qualify for an increased standard deduction. The IRS website offers several resources for homeowners with disabilities.
