When tax time rolls around, many people look for ways to put some money back into their pockets. If you’re a homeowner, you may be able to take advantage of some tax deductions, credits, and exclusions that could lower the amount you owe.
Finding all the tax breaks available to you and making sure you apply them correctly are critical steps in the tax preparation process. Before you file your forms, brush up on some of the most common tax breaks for homeowners and determine whether they might apply to you.
In addition, some states offer tax credits for first-time homebuyers, and other tax benefits for buying a home are available at the state and local levels. As these can change year over year, it is worth checking with your state to see which options are available.
What’s the Difference Between Standard vs. Itemized Tax Deductions?
When preparing your taxes, it’s important to understand the difference between standard and itemized deductions.
The standard tax deduction is a fixed dollar amount that lowers your amount of taxable income. Many taxpayers are eligible for this and the deduction amountdepends on your filing status. The current standard deductions are:
- Married, filing jointly: $25,100 (2021) / $25,900 (2022)
- Single or married, filing separately: $12,550 (2021) / $12,950 (2022)
- Head of household: $18,800 (2021) / $19,400 (2022)
Standard deductions don’t require you to itemize your deductible expenses, eliminating the need to keep track of receipts. This is the easiest option, and for many taxpayers, it also makes financial sense.
However, in some cases, itemizing your deductions may result in lower taxable income. Itemized deductions are different for each taxpayer and will depend on your specific circumstances. Many of the tax breaks for homeowners require you to itemize in order to take advantage of tax deductions. If you decide to itemize, it’s also important to maintain good records so you can prove your expenses in the case of an IRS audit.
Once you’ve confirmed all of your applicable deductions, add up the total and compare it to your standard deduction. If the itemized total is higher, then itemizing will give you a bigger tax deduction. If you find that the total of your itemized deductions is lower than the standard deduction, it’s advisable to take the standard deduction instead.
Tax Breaks for Homeowners
There are many potential tax benefits of buying a home, including deductions for interest, mortgage expenses, and some types of home improvements. You may also be able to utilize deductions for the property taxes you pay and more. The following is a closer look at each of the most common tax breaks for homeowners.
Tax Breaks for Interest
Since many homeowners finance their purchases, tax breaks on interest can be beneficial. Depending on your circumstances, you may be eligible for deductions on the interest you pay on both your mortgage and your home equity loan.
Mortgage Interest Deduction
The mortgage interest deduction is typically one of the biggest tax breaks for homeowners. The amount of the deduction depends on the origination date of the loan. For mortgage debt that was taken out after December 16, 2017, homeowners may deduct the interest on up to $750,000 in debt ($375,000 for married filing separately).
For mortgage loans that originated prior to December 16, 2017, this limit increases to $1 million ($500,000 if married filing separately). Each year, lenders send out a statement (Form 1098) showing how much interest you paid. To file for the mortgage interest deduction, you must file Form 1040 or 1040-SR and itemize your deductions on Schedule A.
Home Equity Loan Interest Deduction
Prior to 2018, it was possible to deduct interest on a home equity loan or line of credit, regardless of how you spent the money. However, since the 2017 tax reform, the IRS now only allows deductions for interest paid on the portion of home equity loans that were used to buy, build, or substantially improve your home. This means that if you took out a $200,000 home equity loan and used $150,000 for home improvement and the remaining $50,000 for college tuition, you would only be able to deduct the interest on $150,000.
The amount of your home equity loan or HELOC also counts towards the mortgage debt limit. If, for example, you had a $600,000 mortgage and a $300,000 home equity loan, you would only be able to deduct the interest paid on $750,000 of your total debt.
Tax Breaks for Home Improvement and/or Usage
The tax code also provides tax breaks for homeowners who make certain upgrades to their homes or use a portion of their homes for business purposes. Some of the most common home improvement and usage deductions include those for energy-efficient upgrades, medically necessary modifications or additions, and home offices.
Energy Efficiency Deduction
Aside from being more environmentally sound, making your home more energy-efficient could make you eligible for tax deductions. Under the Consolidated Appropriations Act of 2021, tax credits are available for:
- Geothermal heat pumps
- Small residential wind turbines
- Solar water heaters
- Solar panels or photovoltaic systems
- Residential fuel cells
- Biomass fuel stoves
Each of these items must meet specific guidelines to qualify, so make sure to check the IRS documentation or speak to a tax professional before making your purchase. It’s also important to note that all of these tax credits are on a sliding schedule and will be reduced each year through the end of 2023. To claim any of the applicable deductions, start by completing IRS form 5695 to calculate your deductible amount. Then, claim the credit on Schedule 3 of Form 1040.
Medical Necessity Improvement Deduction
You may be eligible for a medical necessity improvement deduction if you need to make modifications to your home or install special equipment for medical reasons. This includes updates like:
- Installing handrails
- Adding ramps
- Widening doorways
- Lowering cabinets
- Moving electrical outlets
- Installing lifts or elevators
- Changing doorknobs
- Grading the ground to provide access
To be eligible for the deduction, these upgrades must be deemed “medically necessary.” Changes that simply make the home more elder-friendly, also known as “aging-in-place upgrades,” are not deductible unless they’ve been prescribed.
The IRS also only allows deductions for expenses in excess of the increase in the value of your property. For example, if you spent $50,000 on an elevator installation that increased your home’s value by $30,000, you would only be able to deduct $20,000. Since this is categorized as a medical deduction, you can also only deduct the amount that exceeds 7.5% of your adjusted gross income (AGI).
To claim the deduction, use IRS Capital Expense Worksheet A to calculate the amount of the expense you can include. Then, add this amount to Schedule A of your Form 1040.
Home Office Deduction
If you’re self-employed and work from home, you may be able to take advantage of the home office deduction. To be eligible for a home office deduction, the space must be the principal place of your business and be used regularly and exclusively to conduct business. If your home office qualifies, you may be eligible for deductions on a portion of your home’s utility bills, repairs, insurance costs, mortgage interest, depreciation, and other expenses.
The IRS allows two different claiming methods: regular and simplified. When using the regular method, you would need to keep track of your actual expenses. The deductible percentage will depend on the percentage of your home you use for business. The simplified method uses a standard deduction of $5 per square foot, up to a maximum of 300 square feet.
When using the simplified method, the deduction is claimed on Schedule A. However, if you choose the regular method, the deductions are apportioned between Schedule A and business Schedule C or Schedule F. In either case, you cannot take a deduction that is greater than the amount of your gross income from business less your business expenses.
Tax Breaks for Mortgage
Homeowners who paid private mortgage insurance or discount points on their mortgage may be eligible for additional tax breaks, but there are some limitations. Here’s what you need to know.
Mortgage Insurance Premium Deduction
If you’ve purchased your home without putting down at least 20%, it’s likely that you’re paying private mortgage insurance (PMI). This insurance protects the lender if you default on your loan. Homeowners who paid PMI on loans that originated after 2006 may be able to deduct the premiums on their 2021 tax returns if they itemize.
This deduction phases out if your adjusted gross income is more than $100,000 ($50,000 for married filing separately). Once your AGI exceeds $109,000 ($54,500 for married filing separately), the deduction is completely eliminated. To claim this on your 2021 tax return, refer to box 5 on Form 1098 to determine the amount of premiums you paid for the year, then report the deductible amount on line 8d on Schedule A of your Form 1040.
Unfortunately, the mortgage insurance premium deduction expired at the end of the 2021 tax year. As of the time of this writing, it is unclear whether it will be extended for 2022 and beyond.
When you take out a mortgage, you may choose to purchase “discount points” to lower the interest rate of your loan. In many cases, as long as you’ve used the loan to buy, build, or substantially improve your primary residence, the amount you’ve paid in points is fully deductible in the year you pay them.
It’s important not to confuse this with “loan origination points,” which is the term some lenders use for the fees they charge. These fees don’t affect the interest rate of your loan, so they’re not tax-deductible. To file for a discount point deduction, complete line 8a or 8c on Schedule A of Form 1040.
Other Tax Breaks
Some other potential tax benefits of owning a home include the property tax deduction, capital gains tax deduction, and rental property deduction.
Property Tax Deduction
In addition to income taxes, many property owners also have to pay local real property taxes, and these can be deducted from your federal income tax return. This is a Schedule A itemized deduction, so you can’t take advantage of it if you take the standard deduction. There’s also a $10,000 limit ($5,000 if you’re married filing separately) on the total amount you can deduct for your state and local property, sales, and income taxes. Anything above this amount is not deductible.
Capital Gains Deduction
When you sell your home, you likely won’t have to pay capital gains taxes on all or a portion of the profit, as long as you meet certain criteria:
- You must have owned the home for at least two of the past 5 years
- You must have lived in the home for at least two of the past 5 years
- You must not have used this exclusion within the past two years
When the criteria have been met, married taxpayers filing jointly won’t have to pay taxes on up to $500,000 of capital gains on the sale. Single filers can exclude up to $250,000. Any profit over this exclusion amount is reported as capital gains on Schedule D of Form 1040.
Rental Property Deductions
If you rent out a portion of your home, like the basement or a bedroom, you’ll owe taxes on the rental income. However, you can potentially deduct a portion of your home expenses based on the percentage of the home you rent out. This typically includes expenses like utilities, real estate taxes, repair and general maintenance costs, insurance, supplies, and more. You may also be able to deduct a portion of your home’s depreciation and any equipment or furniture you provide for the rental space.
You don’t have to itemize your deductions on Schedule A to claim the rental property deduction. Instead, you’ll claim it on Schedule E then deduct it from your rental income.
Nondeductible Homeowner Expenses
While there are many tax advantages of buying a home, there are some expenses that typically don’t count. Some common nondeductible homeowner expenses include:
- Homeowner’s association fees
- Home insurance premiums
- Cost of utilities
- Transfer or stamp taxes
- Credit report fees
- Appraisal fees
- Wages for domestic help
- Landscaping and maintenance expenses
- The cost of most home appliances
- Forfeited down payments, deposits, or earnest money
Maximize Your Tax Deductions
Once you fully understand all of the tax breaks for homeowners, you can make sure you claim everything for which you are eligible. Tax code changes often and rules can be complex, so you may want to consider consulting with a tax professional before you make your final decision.