Tax Benefits of Owning a Home

Deductions: 

There are a few deductions you can claim on your tax.  In order to qualify for these deductions, you must own your home and use it as your primary residence.

Mortgage Interest Deduction:  If you took a mortgage to purchase your home, a good portion of the payment will be interest.  Especially during the beginning years of repayment.   Therefore, the interest you can deduct from your taxes will be higher at the start, gradually decreasing. Also, how much you’re able to deduct will also depend on your principal, interest rate, and income taxes. (This information can be found on your mortgage statement.)

Also, you can potentially deduct the interest from a home equity loan (HELOC), a refinanced loan, a line of credit, or a home improvement loan. The IRS states that as long as the funds are used to “buy, build, or substantially improve” your home, you can deduct the interest.

Mortgage Points Deduction:  The last couple of years, as interest rates have risen many buyers may have paid mortgage (or discount) points to the lender to reduce their interest rate on a loan.  The IRS allows you to deduct the amount of money you paid on points as long as prequalifying factors have been met. The amount you paid in points must be itemized on your loan documents.  You can only deduct that amount from your taxes for the year in which you paid them.

Itemized Tax Deduction:

In addition to the standard deductions that the IRS allows, you can claim the following itemized deductions and credits.

Property taxes:  Taxes are usually calculated based on the location and value of your property. You can receive a deduction for almost any property type.  This may include your primary or vacation home, a boat, an RV camper, or even a property outside the US.

Home office:  If you are self-employed and you file your taxes as such, you can deduct your home office.  This is based on the percentage of your home’s total square footage being used as an office. But be careful not to overestimate its size since this can raise a red flag to the IRS.

Home modifications:  The cost of modifications to your home for medical reasons can be deducted from your taxes.   The expenses must exceed 7.5 percent of your adjusted gross income.

Tax Credits:

Tax credits are additional tax benefits of owning a home.  Tax credits give you a dollar-for-dollar reduction on the taxes you owe.

Mortgage tax credit:  Some state and local governments give a Mortgage Credit Certificate to new homebuyers via their lender.   This enables them to receive a tax credit based on a percentage of the interest paid. These rates vary by state and range from 10 to 50 percent.

Energy tax credit:  Depending on your state, you can receive tax credits for energy-efficiency improvements such as replacing insulation, swapping in energy-efficient doors or windows, and installing solar panels. In addition, you can receive a credit of up to $1,000 for installing an electric car charging station in your home.

Other Savings:

Additionally, when selling your home, you won’t have to pay capital gains tax if the appreciation is under $500,000 (if filing as a married couple) or $250,000 (if filing as a single person). However, some restrictions apply. For example, your home must be your primary residence, and you have to have lived in it for two of the past five years. You can also only take this exemption once every two years.

To help you navigate the various tax laws, seek the advice of a tax professional who can work with you to determine what you can legally deduct as a homeowner.