Owning a home is a significant investment, but it also comes with valuable tax benefits that can help you save thousands of dollars each year. Many homeowners overlook critical tax deductions that could reduce their taxable income, ultimately lowering their overall tax liability. Whether you’re a first-time homebuyer or a seasoned homeowner, understanding these deductions can make a huge difference in your financial planning.
In this guide, we’ll explore the top seven tax deductions for homeowners, breaking down how they work and how you can take full advantage of them.
Understanding Tax Deductions for Homeowners
Before diving into the specific tax deductions available, it’s essential to understand how tax deductions work. Homeowners have two main options when filing taxes:
1. Standard Deduction vs. Itemized Deduction
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- The standard deduction is a fixed amount that reduces taxable income. Most taxpayers take this option because it’s simpler and often results in the lowest taxable income.
- Itemized deductions allow homeowners to deduct specific expenses, such as mortgage interest and property taxes, but require detailed records.
For the 2024 tax year, the standard deduction amounts are:
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- $14,600 for single filers and married individuals filing separately.
- $29,200 for married couples filing jointly.
- $21,900 for heads of households.
If your itemized deductions exceed the standard deduction, itemizing is the better option. Now, let’s explore the top tax deductions homeowners should consider.
1. Mortgage Interest Deduction
The mortgage interest deduction is one of the most valuable tax breaks for homeowners. If you have a home loan, you can deduct the interest paid on up to $750,000 of mortgage debt if you are a single filer or married filing jointly. For married individuals filing separately, the limit is $375,000 per person.
How to Claim It:
- Your lender will provide Form 1098, which details the interest paid during the tax year.
- You must itemize your deductions on Schedule A of your tax return.
Pro Tip: If your mortgage was taken out before December 15, 2017, you may qualify for a higher limit of $1 million in deductible interest.
2. Property Tax Deduction
Homeowners can deduct up to $10,000 in state and local property taxes (SALT) on their federal tax returns ($5,000 if married filing separately). Since property taxes can be substantial, this deduction is a valuable way to lower your tax bill.
Eligibility & Limitations:
- The deduction applies to state, local, and real estate property taxes.
- The $10,000 cap includes both property and state income taxes.
Example: If your annual property tax bill is $6,500 and your state income tax is $4,000, you can only deduct up to $10,000 of the combined amount.
3. Home Equity Loan Interest Deduction
If you’ve taken out a home equity loan or home equity line of credit (HELOC), you may be able to deduct the interest—but only if the funds were used for home improvements. This deduction was limited by the Tax Cuts and Jobs Act (TCJA) of 2017, so using these funds for personal expenses (like paying off credit card debt) won’t qualify.
How to Qualify:
- The loan must be secured against your primary or secondary residence.
- The borrowed funds must be used to buy, build, or improve the home.
- Interest on home equity loans used for non-home-related expenses is NOT deductible.
4. Discount Points Deduction
When securing a mortgage, you may have paid discount points to lower your interest rate. These points are considered prepaid interest and are deductible.
Key Facts:
- One discount point = 1% of the mortgage amount.
- The deduction applies only if points were paid directly to lower your mortgage interest rate.
- If the points were paid for a refinance, they must be deducted over the life of the loan.
Example: If you paid $3,000 in points on a $300,000 mortgage, you could deduct that cost if it was for a primary home purchase.
5. Home Office Deduction
If you use part of your home exclusively for business, you may qualify for a home office deduction. This applies to both homeowners and renters, allowing you to deduct a portion of your mortgage interest, utilities, and other expenses.
How to Claim:
- The IRS offers a simplified method, allowing homeowners to deduct $5 per square foot, up to 300 square feet ($1,500 maximum).
- The space must be used regularly and exclusively for business purposes.
- W-2 employees are NOT eligible—this applies to self-employed individuals and business owners.
6. Medical Home Improvement Deductions
Certain home improvements made for medical reasons may be tax-deductible. These include modifications such as installing wheelchair ramps, widening doorways, or modifying bathrooms for accessibility.
Key Rules:
- The IRS allows deductions for medical home improvements if they exceed 7.5% of your adjusted gross income (AGI).
- The deduction applies to expenses that don’t increase the home’s resale value.
7. Capital Gains Tax Exclusion
If you sell your home for a profit, you may qualify for a capital gains tax exemption. If you’ve lived in your home for at least two of the last five years, you can exclude up to $250,000 in gains as a single filer, or $500,000 as a married couple filing jointly.
Example:
- You bought a home for $200,000 and sold it for $450,000.
- Your capital gain is $250,000.
- If you’re single, you qualify for the full exclusion and owe $0 in capital gains tax.
FAQs
What tax deductions do homeowners qualify for?
Homeowners may qualify for deductions on mortgage interest, property taxes, home equity loan interest, home office expenses, and medical home improvements.
Should I itemize or take the standard deduction as a homeowner?
If your itemized deductions exceed the standard deduction, itemizing is the better option.
Can I deduct home improvements on my taxes?
Only medically necessary modifications and improvements paid for using home equity loans qualify for deductions.
Do I have to pay capital gains tax when selling my home?
If you meet the ownership and use test, you can exclude up to $250,000 ($500,000 for married couples) in capital gains.
Final Thoughts
Owning a home comes with significant tax advantages. Whether you’re a first-time homebuyer or an experienced homeowner, knowing these deductions can help you save money. Keep detailed records, consult a tax professional when needed, and explore every tax break available to you.
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