For most Americans, buying a home is the biggest financial decision they’ll ever make. It’s not just a place to live; it’s an investment, a source of pride and, surprisingly, a way to save on taxes.
Thanks to the generous homeowner tax benefits Congress has given homeowners, your house can do more than just keep you warm and dry: it can also help keep more money in your pocket. Let’s break down how your homeowner tax benefits can shelter you from taxes.
The Basics of Homeowner Tax Benefits
The Internal Revenue Service (IRS) provides a detailed guide called Publication 530: Tax Information for Homeowners, which is updated every year. This guide outlines the many ways homeowners can save on taxes. Whether you’re buying a home, selling one, or making improvements, there are opportunities to cut down your tax bill. Here’s what you need to know.
Deductions: Lowering Your Taxable Income
Deductions are expenses you can subtract from your income, which reduces the amount of income you’re taxed on. Homeowners have access to several key deductions, but you’ll need to itemize your deductions instead of taking the standard deduction to benefit from most of them.
1. Mortgage Interest Deduction
One of the biggest tax breaks for homeowners is the ability to deduct the interest you pay on your mortgage. This applies to loans on your primary home and even a second home. However, there are limits:
- For mortgages taken out before December 15, 2017, you can deduct interest on up to 1 million of debt (500,000 if married filing separately).
- For mortgages taken out after December 15, 2017, the limit drops to 750,000 of debt (375,000 if married filing separately).
This deduction isn’t just for your primary mortgage: it also applies to home-equity loans, home-improvement loans and refinanced mortgages, as long as the money is used to buy, build, or substantially improve your home.
Important Note: These rules are set to expire after 2025 unless Congress decides to extend them. For more details, check out IRS Publication 936: Home Mortgage Interest Deduction.
2. Deduction for State and Local Property Taxes
Homeowners can also deduct state and local real-estate taxes, but there’s a catch. The SALT (State and Local Tax) cap limits this deduction to $10,000 per return ($5,000 if married filing separately). This cap has been controversial in states with high property taxes, and it’s set to expire at the end of 2025. If it does, or if the cap is raised, more homeowners may be able to benefit from the deduction.
3. Home-Office Deduction
If you’re self-employed and use part of your home exclusively and regularly for business, you can deduct expenses related to your home office. However, this doesn’t apply if you’re working remotely for an employer and receive a W-2.
The IRS offers a simplified method for calculating this deduction: $5 per square foot of the portion of your home used for business, up to a maximum of 300 square feet. For more details, see IRS Publication 587: Business Use of Your Home.
What You Can’t Deduct
While homeownership comes with many tax perks, there are some expenses you can’t deduct including:
- Homeowners or condominium association fees
- Insurance (including title insurance)
- Wages paid for domestic help
- Depreciation
- The cost of utilities, home repairs, or internet/Wi-Fi
Credits: Dollar-for-Dollar Tax Savings
Unlike deductions, which lower your taxable income, tax credits directly reduce the amount of tax you owe. Homeowners have access to some valuable credits, especially if they make energy-efficient upgrades.
1. Energy-Efficient Home Improvement Credit
If you make certain energy-efficient renovations to your home, you can claim a tax credit of up to $3,200 per year. This credit equals 30% of the cost of qualifying improvements like:
- Insulation, windows, and door
- Heat pumps, water heaters, and biomass stoves
There are sublimits for different types of improvements. For example, you can claim up to $600 for windows and $2,000 for a heat pump. These credits were expanded under the Inflation Reduction Act of 2022, but they could come under scrutiny in the new Trump administration. For more information, visit the IRS Energy Efficient Home Improvement Credit page.
2. Solar, Wind and Geothermal Credit
Homeowners who install solar panels, wind turbines, geothermal systems, solar water heaters, or battery storage can claim a residential clean-energy credit. This credit covers 30% of the cost of the improvements, with no annual or lifetime maximum.
If the credit surpasses your tax liability, you can carry the unused portion forward to future tax years. However, like the energy-efficient credit, this one could also be revisited by Congress. For details, check out the IRS Residential Clean Energy Credit page.
Selling Your Home: The Home-Sale Exclusion
If you sell your home for more than you paid for it, you may owe capital-gains taxes on the profit. However, the home-sale exclusion allows you to exclude a big portion of that gain from taxes:
- Single filers can exclude up to $250,000 of capital gains.
- Married couples filing jointly can exclude up to $500,000.
To qualify, you typically must have lived in the home as your primary residence for at least two of the previous five years. The gain is calculated as the difference between the selling price and your adjusted basis—what you paid for the house plus any renovations or capital improvements. For examples of qualifying improvements, see IRS Publication 523: Selling Your Home.
Leaving Your Home to Heirs: The Ultimate Tax Break
If you hold onto your home until your death, your heirs may benefit from a step-up in basis. This means the value of the home is reset to its fair-market price at the time of your death. As a result, your heirs would only owe capital-gains taxes on any increase in value that occurs after they inherit the property. This can be a weighty tax-saving strategy for passing wealth to the next generation.
Conclusion
Owning a home is a powerful financial tool that can help you save on taxes. From deducting mortgage interest and property taxes to claiming credits for energy-efficient upgrades, the tax benefits of homeownership are substantial. But these rules can change, and it’s important to stay informed and consult a tax professional if you’re unsure about how to maximize your savings.
By understanding the tax breaks available to you, you can make the most of your investment and keep more money in your pocket. After all, your home isn’t just a shelter from the weather. It’s also a shelter from taxes.
