8 Tax Deductions For Homeowners

Homeownership brings many benefits!

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 Internal Revenue Service (IRS) makes the standard deduction available to all tax filers. The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

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.

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

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

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. 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 separately.

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.

However, 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 business in your residence, you may be 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, or just for working from home for your employer, 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 must 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.

Please verify all info with IRS: https://www.irs.gov/taxtopics