We’re about to reveal the best and biggest tax breaks for homeowners.
Homeownership offers some of the best tax deductions and tax credits that can save you thousands of dollars in taxes.
Yet, every year, homeowners miss out because they are not aware.
But you’re not one of them…
Because if you read this post today, you will know the best and biggest tax deductions available to homeowners so you can benefit BIG TIME.
Let’s jump right to it!
8 Tax Breaks for Homeowners You Need to Know
1. Mortgage Interest
One of the most significant tax breaks for homeowners is the mortgage interest deduction.
This interest deduction applies to interest on loans used to buy, build and improve your home.
Qualifying improvements include additions and major improvements.
The mortgage interest deduction is limited to two homes: any combination of your primary home, second home, boat, or vacation home.
If you happen to be Drake or Mark Zerchumberg and have more than two homes, be sure to take the mortgage interest deduction on the two properties to create the biggest tax savings.
For mortgages on or before December 15, 2017, 1 million dollars is the debt limit for this deduction. ($375,000 if you’re married and filing separately)
For mortgages after December 15, 2017, $750,000 is the debt limit for the deduction. ($500,000 if married and filing separately)
The best way to know how much you paid in interest each year will be to look at the form your mortgage servicer sends you each year. That form is called Form 1098.
2. Mortgage Points
Mortgage points, also known as loan origination fees, are extra fees you pay to your lender to lower your mortgage interest rate.
One mortgage point equals 1% of your loan amount.
If you paid points on the mortgage for your primary home, you might be able to fully deduct the points in the year they were paid.
On the other hand, if you paid points to refinance your mortgage or purchase a second home, you will generally deduct the mortgage points over the life of the loan.
So if you paid points to refinance a 30-year mortgage, you would deduct 1/30th of the total points paid each year.
If you pay off the loan early, you can deduct the remaining mortgage points in the year you pay off the mortgage unless you refinance with the same lender.
3. Private Mortgage Insurance
If you put less than 20% down or refinance with less than 20% in equity, lenders typically require you to pay monthly Private Mortgage Insurance (also known as PMI) with your mortgage.
If you are married filing jointly and make $100,000 or more in adjusted gross income the deduction begins to phase out.
After $109,000 in adjusted gross income, the deduction disappears entirely.
Currently, the private mortgage deduction ended in 2020 but may get extended by congress again as it has in the past.
We’ll keep an eye on it for you.
4. Property Taxes
The bad news: Every state in the US has property taxes.
The good news: You can deduct the state and local property taxes you pay.
But, there are some things to keep in mind.
First, $10,000 ($5,000 when married filing separately) is the limit on the total amount of state and local income taxes and sales you can deduct.
Second, to claim this deduction, you do have to itemize.
5. Residential Energy Credit
Uncle Sam likes energy efficiency.
So much so that you can get a tax credit when you install appliances or make improvements that boost your homes’ energy efficiency.
Examples of qualifying appliances or improvements include windows and doors that are energy-efficient and solar-powered water heaters and roofs.
The tax credit is based on the cost of equipment, including installation costs.
Here’s how the tax credit works:
- 30% credit for systems placed in service by December 31, 2019.
- 26% credit for systems placed in service after December 31, 2019, and before January 1, 2021.
- 22% credit for systems placed in service after December 31, 2020, and before January 1, 2022.
The residential energy credit expires at the end of 2021, so if you are thinking about going solar or installing energy-efficient appliances… do it before the end of 2021.
Note that existing homes and new construction qualify for the energy credit, but rentals properties do not.
6. Home Office Expenses
If you own a business and use a space in your home dedicated and regularly used to conduct business, you may be able to deduct related expenses.
The best part is that the type of home you live in or whether you rent or own it does not matter.
If you meet the guidelines, here are 4 everyday home office expenses that are deductible:
- Utilities such as electricity, gas internet, and your phone bill
- Homeowners Association payments
- Homeowner’s insurance
- Cleaning supplies and services for your business space
You can also write off expenses for repairs or upgrades you make to your home.
Unfortunately, the home office deduction does not apply if you are a remote employee and work from home.
If you’d like to learn more about home office deductions, we made an entire post on the subject which you can read next.
7. Medically Necessary Upgrades and Equipment
If you install equipment or modify your home for medical purposes for yourself, your spouse, or your dependent, you may qualify for a medical expense deduction.
Ramps, handrails, and lifts are typical examples of medical equipment and modifications that can qualify for the deduction.
Additionally, the cost to maintain and operate the equipment and modifications are deductible as well.
If the addition or modification increases your home’s value (most do not), the deductible cost is reduced by the increase in home value.
8. Capital Gains
For most people, when they can sell their primary home for a capital gain, they will be able to do so completely tax-free.
Thanks to the Taxpayer Relief Act of 1997, gains on the sale of your home up to $500,000 ($250,000 if filing single) are tax-free.
But there are some requirements…
Here’s how to qualify:
- You owned your home for at least two of the last 5 years
- You lived in the home at least two of the last 5 years
- You didn’t use this exclusion in the last two years.
Suppose you don’t meet the requirements but had to sell because of work relocation, divorce, health problems, or unforeseen circumstances. In that case, you may still be able to eliminate a portion of your profits.
Now, for good measure, let’s look at a few costs that are generally not tax-deductible for most homeowners:
- Some mortgage costs, such as credit report and appraisal fees
- Depreciation, unless it is an investment property
- Forfeited deposits, down payments, or earnest money to secure the property
There you have it. 8 tax breaks for homeowners and home purchasers!
We hope you found this post helpful. And if you need more help in calculating, planning, and preparing your taxes to save more money, legally, check our tax services today.