What Are the Tax Benefits of Homeownership?

by | Mar 18, 2020

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Buying your first home is an exciting part of the American dream. Nothing quite says “success” like stepping into the world of real estate.

The transition from renter to homeowner can be rife with complications and costly expenses. Between the down payment, closing costs, monthly mortgage payments, and unexpected repairs, homeowners need all the tax breaks they can get. 

Thankfully, there are tax incentives and write-offs available to help offset some of the ugly surprises of homeownership. Read on to learn about the tax benefits all home buyers should take advantage of. 

Mortgage Interest Deduction

For most homeowners, the biggest tax break comes from a mortgage interest deduction. This deduction allows homeowners to deduct any interest they pay on loans they’ve used for their primary residence. This includes loans for building, purchasing, or making improvements upon their home. 

You can also take this deduction on loans for a second home or even a vacation home (under certain limitations). 

Prior to 2018, taxpayers could deduct interest on their home equity loans or line of credit. They could do so even if they used the money for other expenses like credit card debt.

Now, after the tax reform, however, this interest is no longer considered a deductible, unless filers use the home loan for purchasing, constructing or repairing their home. 

Itemized Deductions

One of the best ways you can reduce your taxable income is by itemizing your deductions. 

Itemizing lets you claim more than the standard deduction. It does, however, require you to maintain thorough records of all your expenses and fill out extra paperwork

Examples of itemized deductions include:

  • Mortgage interest you’ve paid on up to two homes
  • Donations to charity (up to 60% of your adjusted gross income)
  • Property taxes
  • Investment interest

Prior to the Tax Cuts and Jobs Act, assorted deductions like work-related travel expenses and union dues were included. You cannot deduct these expense types for federal tax anymore, though some states will still allow it. 

Private Mortgage Insurance (PMI) is another itemized deduction you can claim. You will only be able to claim this until the end of the 2020 tax year. 

Joint Homeownership

We know now that homeowners can deduct both property taxes and mortgage interest from their taxable income. What happens, though, if there is more than one name on the deed? It depends on what ownership status is in place. 

Married couples should file a joint return. Doing so will pool both incomes and expenses on one tax return. You won’t have to waste time trying to determine who paid what. 

The standard deduction for joint married filing rose to $24,800 for the 2020 tax season. It can get complicated for spouses living in community property states if they choose to file separately. Even if one person pays all of the house-related expenses, they both have to claim half of the relevant deductions and credits.  

If a number of people own a home together,  mortgage interest can be deducted based upon the share of ownership. If someone owns 50% of the home, for example, they can claim half of the interest as a deduction.  

For single taxpayers or couples filing separately, deduction amounts rose to $12,400 this year.

Home-Office Expense Deduction

Self-employed homeowners may be able to deduct expenses they incur for the business use of their home. Though it’s important to note that not everyone who works from home is eligible for this tax bill deduction. They must use a portion of their home exclusively for business purposes. 

If you’re eligible, part of your home bills, insurance, and general home expenses can be deducted against your business income. 

You cannot claim a home office deduction if you work as a remote employee. This is due to the Tax Cut and Job’s Act tax reform suspensions that are in place until 2025. 

Capital Gain Exclusion

When it’s time to sell your home, you might not have to pay taxes on the gain from the sale. 

Your home is a capital asset. Typically, you would have to pay a capital gains tax when making a profit from a capital asset. If you’re married and file a return together, you won’t have to pay tax on up to the first $500,000 of the gain from the sale under certain stipulations.

Even if you don’t meet all the requirements, you may still be able to exclude a portion of your home-sale profits. For example, if you’ve had to move due to job relocation or your health, the total amount of the exclusion will depend on several factors, like how close you’ve come to satisfying the homeownership. 

Tax-Deductible Home Improvement Costs

Generally, any repairs or home improvements you make are not deductible. It’s worth noting, however, this may depend upon the type of improvements you’re making.

For example, if you add a swimming pool or covered patio, your home may be worth more. These types of changes make your home more tax valuable if the improvement is funded through refinancing. 

Eligible improvements won’t be deductible on your tax bill for the current year. They can help lower your tax burden when it comes time to sell your home, though.

You can add the improvements you’ve done to your adjusted basis. This is what you’ve paid for your home and any construction or renovation costs minus any losses you’ve incurred from damages. 

The costs necessary to maintain your home are not considered to be home improvements. You cannot claim these costs as tax deductions. If your repairs wind up being extensive, however, they could be considered eligible for a deduction. 

We recommend speaking with a tax professional to ensure you’re using the right funding to qualify for deductions. 

Property Tax Deduction

One of the annual local taxes you should get used to paying as a homeowner is your property tax. Real estate taxes can be quite high in some areas, but it is possible to deduct some (or even all) of your property taxes. 

This deduction may not be viable for everyone, however. You’ll need to itemize to be eligible to deduct your property taxes.  There is also a $10,000 limit on the amount of state and local income, sale and property taxes you’re able to deduct ($5,000 if married filing separately).

Residential Renewable Energy Tax Credit

You’ll receive a tax credit if you invest in certain clean energy equipment for your home. The DSIRE website will provide insight into what policies and incentives are available in your state. 

A solar energy system will not only help the environment, but it’s also great for your tax refund, too. The IRS will allow a tax credit worth 26% of the cost of your new system. 

You can claim this credit for solar, wind, and geothermal equipment for your principal residence and a second home. If you invest in fuel-cell equipment, however, only your main residence will qualify. 

If you’re considering taking advantage of this tax benefit, do so as soon as possible. The credit amount for home improvements will be defunct after 2021. 

Check out the DSIRE website to see which policies and incentives are available in your state. 

Reap the Benefits of Homeownership Today

Hopefully, you’ve learned something about the tax benefits of homeownership. Knowing your rights at tax time is important whether you’re a first-time homebuyer or on your second or third home. Our tips should help you save on the costs of homeownership and how to sell your home tax-free. 

We hope you’ve found some tax breaks when it comes time to pay your federal income tax this year.

If you’re about to buy your first home, our Mortgage Advisor tool can help. We can help you research questions you may have about mortgage debt or home mortgage interest.

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