8 Tax Breaks for Homeowners

From property taxes to upgrades and maintenance, the costs of buying and owning a home can add up quickly. The good news is that some of these expenses can help lower your tax bill. There are several tax breaks for homeowners to take advantage of if you know where to look. Below, we’ll explain each one so you can better understand how these deductions and credits may reduce your overall tax burden.

Before we proceed, keep in mind that you need to itemize your deductions to take advantage of these tax breaks. If you opt for the standard deduction, these do not apply.

1. Tax credits for efficient home upgrades

Home improvement projects can improve the safety and functionality of your living space, but they can also be beneficial for tax purposes. Home upgrades that improve your home’s energy efficiency can qualify you for a tax credit of up to $3,200. Energy-efficient home upgrades like exterior doors and skylights can account for up to $1,200 in credits, while the remaining $2,000 can count toward things like qualified heat pumps and water heaters. Because this is a tax credit (not a deduction), it directly reduces the amount of tax you owe.

2. Mortgage interest tax breaks

If you choose to itemize your deductions, you can reduce your taxable income by deducting the interest from your mortgage payments. 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 their home’s value. If the home was purchased before 2017, that limit is $1 million. This deduction lowers your taxable income, which may reduce the amount you owe in taxes.

3. Property tax deductions

Homeowners are allowed to deduct property taxes from their federal return. Couples who file jointly can deduct up to $10,000, while those filing separately can deduct $5,000. This is especially beneficial in states like New York and New Jersey, which have some of the highest property tax payments in the country. Keep in mind this falls under the SALT (state and local tax) deduction cap.

4. Home equity loan or HELOC deductions

Home equity loans and home equity lines of credit (HELOC) 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 payments from these. However, this deduction only applies if the funds are used to buy, build, or substantially improve the home securing the loan. This deduction also applies to the first $750,000 of your mortgage. When eligible, this can help reduce your taxable income.

5. Home office tax breaks

For those who are self-employed and work from home, you can use your home office to lower your tax bill. As long as it meets IRS requirements, you can use your home office to deduct from your utilities, insurance, and property taxes based on the percentage of your house’s square footage that is occupied by the office. 

For example, an office that takes up 6% of your home’s area would allow you to deduct 6%. 

Keep in mind that in order to qualify for this tax break, your office must meet the following requirements:

• Be used exclusively and regularly for business purposes
• Be your principal place of business

6. Discount points (mortgage points)

Homebuyers can purchase discount points, or mortgage points, to lower the interest rate on their mortgage payment. But that’s not all they’re good for, as buying discount points can also provide buyers with some tax relief. According to the IRS, homeowners can only claim this deduction under certain conditions. In many cases, points are deductible in the year they are paid, though some may need to be deducted over the life of the loan.

7. Capital gains deductions

Most people think of stocks and investments when it comes to capital gains, but home sales also apply. When 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), provided you meet IRS ownership and use requirements. The amount of tax you owe depends on how long you’ve owned the property and your overall gain. This exclusion can significantly reduce or even eliminate your capital gains tax.

8. Rental property deductions

Your primary residence isn’t the only one that allows you to cash in on some homeowner tax breaks. If you own a rental property, you can deduct expenses such as property taxes, mortgage interest, utilities, maintenance, and repairs. If you rent out a portion of your home, you may deduct a proportional share of these expenses based on the rented space. These deductions can help offset rental income and reduce your taxable income.

Understanding these tax breaks can help you make the most of homeownership come tax season. Because tax rules can change and individual situations vary, it’s a good idea to consult with a tax professional to ensure you’re taking full advantage of the benefits available to you.

FAQ about tax breaks for homeowners

What home expenses can’t I deduct?

While you can leverage some home expenses to lower your tax bill, not everything qualifies. Here are some costs that you can’t count against your taxable income:

• Homeowners insurance premiums
• Mortgage payment principal
• Depreciation (for primary residences)
• Down payment

Are there any tax breaks for new homeowners?

While there are limited tax breaks specifically for first-time homebuyers, there are still some potential benefits. For example, while most people have to pay a 10% penalty for early Roth IRA withdrawals, first-time homebuyers under the age of 59 ½ may withdraw up to $10,000 without penalty to purchase a home.

Do disabled homeowners qualify for any additional tax benefits?

There are various deductions available to those living with disabilities or parents of children with disabilities. For example, legally blind homeowners can qualify for an increased standard deduction. The IRS website provides several resources for homeowners with disabilities.