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8 Tax Deductions For Homeowners: Your Breaks And Benefits

Sarah Sharkey5-minute read

October 19, 2021

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When tax time rolls around each year, homeowners may decide to take advantage of tax breaks in their favor. Luckily, there are many tax deductibles for homeowners that could amount to several thousand dollars.

Let’s take a closer look at which of your household expenses are deductible as a homeowner. Plus, consider whether or not you should take the standard deductible instead.

Standard Vs. Itemized Deductions

Before we dive into the deductions available for homeowners, it is essential to understand the difference between standard and itemized deductions. Both types of deductions can lower your overall income tax burden by reducing your taxable income.

The standard deduction is made available by the IRS for all tax filers. In 2020, the standard deduction breaks down like this:

  • For single and married individuals filing taxes separately, the standard deduction is $12,800.
  • For married couples filing joint, the standard deduction is $24,800.
  • For heads of households, the standard deduction is $18,650.

With the standard deduction, you can reduce your taxable income by a standard amount. When you itemize deductions, including tax breaks for homeowners, you forgo the standard deduction. Instead, the total amount of the itemized deductions will offset your taxable income and lower your tax burden.

If you are considering taking advantage of tax deductions for homeowners, then make sure that the total amount of your itemized deductions is larger than the standard deduction. Otherwise, it makes more financial sense to take advantage of the standard deduction to keep your tax liabilities as low as possible.

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Nondeductible Home Expenses

Once you start to explore the deductible expenses available, you may want to expand your deductions to encompass any number of home expenses. But you should be aware of some nondeductible home expenses, including:

  • Fire insurance
  • Homeowner’s insurance premiums
  • The principal amount of mortgage payment
  • Domestic service
  • Depreciation
  • The cost of utilities, including gas, electricity, or water
  • Down payments

As a homeowner, you won’t be able to deduct away all of your housing expenses. If you have questions about what you cannot deduct, take some time to consult with a tax professional.

8 Tax Breaks For Homeowners

The IRS has extensive rules about the tax breaks available for homeowners. I’ve pulled out the tax deductions that are most important for homeowners to consider.

With that, let’s dive into the tax breaks you should consider as a homeowner.

1. Mortgage Interest

If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest.

In the past, homeowners could deduct up to $1 million in mortgage interest. However, the Tax Cuts and Jobs Act has reduced this limit to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the deduction limit is $375,000 for each party.

2. Home Equity Loan Interest

A home equity loan is essentially a second mortgage on your house. With a home equity loan, you can access the equity you’ve built in your home as collateral to borrow funds that you need for other purposes.

Like regular mortgage interest, you can deduct the interest you’ve paid on home equity loans and home equity lines of credit. However, you can only make this deduction if you used the borrowed funds to pay for a home improvement. Prior to the Tax Cuts and Jobs Act of 2017, you could deduct the interest on these loans regardless of how you spent the funds.

3. Discount Points

When you take out a mortgage, you may have the option to purchase discount points to lower your interest rate on the loan. If you have this option, one discount point will equate to 1% of the mortgage amount.

If the points are purchased to reduce the mortgage’s interest rate, you can deduct the cost of the discount points. However, ‘loan origination points’ will not be tax deductible because these are fees that don’t affect the interest rate of your loan.

4. Property Taxes

As a homeowner, you’ll face property taxes at a state and local level. You can deduct up to $10,000 of property taxes as a married couple filing jointly – or $5,000 if you are single or married filing separate.

Depending on your location, the property tax deduction can be very valuable.

5. Necessary Home Improvements

Necessary home improvements can qualify as tax deductions. Of course, the definition of ‘necessary’ is somewhat limited. If you decide to upgrade your fully functioning kitchen, those improvement costs may not qualify.

But, if you have to make permanent improvements to make your home more accessible for medical reasons, that should qualify. A few examples might include installing medical equipment, installing railings or widening doorways for an accessible home.

6. Home Office Expenses

If you operate a home office in your residence, you can deduct some of the expenses of maintaining that space. The IRS requires that you use your home office for regular and exclusive business use in order to qualify for a deduction. If you only use the office space when it is convenient, that will not qualify.

In terms of the deductions, the size of the deduction is based on the percentage of your home dedicated to the place of business.

7. Mortgage Insurance

Private mortgage insurance, or PMI, is another expense that many homeowners have to factor into their budget. PMI is there to protect your lender if you are unable to continue making payments on your mortgage.

You can deduct your mortgage insurance payments on your itemized tax return.

8. Capital Gains

Capital gains tax breaks come into play when you sell your home for a profit. The capital gain is the difference between the value of the home when you bought it and when you sold it. For example, let’s say you bought your home for $100,000. A few years later, you sell your home for $150,000. With that deal, you would walk away with a capital gain of $50,000.

If you were using the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation. As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.

The key is that you lived in the house for 2 of the last 5 years. With a big tax break on the table, it’s important to take this deduction seriously.

Your Tax Return Strategy

Owning a home comes with a suite of financial benefits. But it’s important to approach tax season as a homeowner with a careful eye on maximizing the value of your home.

With potentially thousands of dollars in tax deductions on the table, it’s a good idea to add up your tax breaks. Compare the sum of your itemized deductions to the standard deduction before deciding which option is best for your tax return.

If you are a homeowner, then you should take some time to explore your tax deductions. If you need help tackling the details of your situation, I recommend speaking to a tax professional to ensure that you are cashing in on all of the tax deductions available to you.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.