Owning a house in the US is expensive, especially with rapidly rising home prices over the past decade -- theCase-Shiller US National Home Price Indexhas set record highs for the past several years. And in additional to expensive down payments and mortgages, US homeowners pay an average of $17,459 every year for "hidden expenses," according to the Real Estate Witch.
All those expenses come with a silver lining, however -- tax credits and deductions for your home that can lead to a bigger tax refund. For homeowners, learning as much as you can about your potential tax benefits can help you maximize your tax refund when you file your income tax return.
Most homeowners with mortgages know they can deduct payments toward their loan interest, but many tax deductions and tax credits involved in owning a house are less obvious. Learn about all the possible tax breaks for homeowners to get the biggest refund possible on your taxes.
For more on taxes, learn about the biggest tax credits and how to create an online IRS account.
How can homeowners take tax breaks?
Most income tax breaks for homeowners are tax deductions, which are reductions to your taxable income. The less of your income that is taxed, the less money you pay in taxes.
When you file your tax return, you must decide whether to take the standard deduction -- $13,850 for single tax filers, $27,700 for joint filers or $20,800 for heads of household or married filing separately -- or itemize deductions, such as gifts to charity and state taxes.
To take advantage of homeowner tax deductions, you'll need to itemize your deductions using Form 1040 Schedule A. Your decision to itemize will depend on whether your itemized deductions are greater than your standard deduction. All of the best tax software can quickly help you decide whether to itemize (as well as help you fill out all of the tax forms mentioned in this article).
Tax credits for homeowners don't require you to itemize. They directly reduce the amount of taxes you owe, and you can usually get those credits whether or not you itemize deductions.
Mortgage interest deduction is a big tax break
Mortgage interest -- or the amount of interest you pay on your home loan yearly -- is one of the most common tax deductions for homeowners. It's also often the most lucrative, particularly for new homeowners whose payments generally go more toward loan interest during the first years of a mortgage.
Homeowners filing taxes jointly can deduct all payments for mortgage interest on loans up to $1 million, or loans up to $750,000 if made after Dec. 15, 2017. Single filers get half those amounts -- $500,000 or $375,000, respectively.
To deduct your mortgage interest, you'll need to fill out IRS Form 1098, which you should receive from your lender in early 2024. You can then enter the amount from Line 1 on that Form 1098 into Line 8 of 1040 Schedule A.
Mortgage points can be deducted, too
You can buymortgage points, also called "discount points," when buying a house to decrease the interest on the mortgage. Each 1% of the mortgage amount that home buyers pay on top of their down payment generally reduces their interest rate by 0.25%, though the exact amount will depend on the lender and the loan.
Discount points can save you big money on a 30-year mortgage by lowering the total interest you'll have to pay across decades, but they can also save you money on your taxes when you buy them. The IRS considers mortgage points to be prepaid interest, so you can add the amount paid for points to your total mortgage interest that's entered on Line 8 of 1040 Schedule A.
Mortgage-interest tax credits can give new homeowners big money
Homeowners who have received a Mortgage Credit Certificate from a state or local government -- usually acquired via a mortgage lender -- can get a percentage of their mortgage interest payments back as a tax credit. Mortgage certificate credit rates vary based on states and can range between 10% and 50% up to a maximum credit of $2,000.
This homeowner tax tip is most effective if you are a first-time homeowner, which is generously defined as not living in a home that you've owned for the past three years. If you're buying your first home, be sure to ask your lender or mortgage broker to see if you qualify for an MCC.
To file for your mortgage-interest tax credit, use IRS Form 8396. Remember, you don't need to itemize deductions to claim tax credits.
Property taxes are deductible, but only in part
Local and state real estate taxes, more commonly called property taxes, can be deducted from your taxes, but at a far lower amount than before 2017.
Thanks to the Tax Cuts and Jobs Act of 2017, you can only deduct up to $10,000 combined from your property taxes and state and local income taxes. Before 2017, your entire amount of property taxes was deductible.
To claim your property tax deduction, you'll need to track your annual property tax payments. Your real estate taxes might also be listed in Box 10 of Form 1098 from your mortgage lender. Enter your total amount of real estate taxes paid for the year in Line 5b of 1040 Schedule A.
Home office expenses can be deducted if you're self employed
Homeowners who use any part of their house, apartment or condo "exclusively and regularly" for their own business or side gig can claim home business expenses using IRS Form 8829. These deductions are available to renters, too.
The easiest way to claim a home-office tax break is by using the standard home-office deduction, which is based on $5 per square foot used for business up to 300 square feet. The "regular method" for deducting a home office involves calculating the percentage of your home that is used for business. Both methods use Form 8829 for reporting.
Home-office deductions aren't available to remote employees of companies.
Get 30% back on the cost of an electric vehicle charging station
Electric vehicle charging stations can give you money back on your tax bill. If you install any alternative energy charging station in your home, you get a maximum credit of 30% of the cost or $1,000 (whichever is smaller). File IRS Form 8911 to claim your tax credit for the money spent on clean energy installation.
Energy-efficiency tax credits get even bigger in 2024
If you made energy-efficient improvements to your home in 2023, you can likely get back some of that money as tax credits, but it gets a little complicated. There are two types of tax credits for home energy improvements -- the residential clean energy credit and the energy efficient home improvement credit.
The residential clean energy credit can give you 30% back on any money you spent installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems or fuel cell property. The only limit is for fuel cell property -- $500 for each half a kilowatt of capacity.
The energy-efficient home improvement credit, also known as the nonbusiness energy property credit, is then split into two categories -- "residential energy property costs" and "qualified energy efficiency improvements."
In the first case of energy property costs, you'll get a flat tax credit of $50 to $300 for installing Energy Star-certified items like heat pumps, water heaters or furnaces. In the second case of qualified improvements, you can get a 10% tax credit for the cost of improvements like adding insulation, fixing a roof or replacing windows.
The energy efficient home improvement credit previously had a $500 lifetime limit for all improvements, but starting with the 2023 tax year, the Inflation Reduction Act replaces that lifetime limit with a $1,200 annual limit.
To claim tax credits for energy-efficient home improvements made in 2023, you'll need to document your costs on IRS Form 5695.
You can also deduct interest from home equity loans
Any interest from a home equity loan or second mortgage can be deducted from your taxes just like regular mortgage interest, with the important limit of maximum loan totals of $1 million or $750,000 (for joint filers) if you purchased your home after Dec. 15, 2017.
It's also very important to note that the 2017 tax law limits deductions for home equity loan interest to money that is used to "buy, build or substantially improve" homes. If you borrowed money to pay for a new car or vacation, you're out of luck.
If you did pay interest on a home equity loan that was used directly on your residence, you can claim the deduction on the same line as mortgage interest and mortgage points: Line 8 on Form 1040 Schedule A.
When selling a home, include all your improvements in the cost basis
Any income you earn from selling a home is taxable as a capital gain (with a notable exclusion -- see below). Your gain is calculated by the difference between your sale price for the home and your "cost basis." That cost basis includes what you paid for the home, the price of improvements that you may have made as well as any property loss from depreciation or casualty.
If you've put in a new roof, replaced a furnace, refinished floors or even landscaped the garden, be sure to include those costs to increase your adjusted basis and reduce the amount of your capital gains on the sale.
If you sold your primary residence, you get a great tax deduction
When you sell a home, you'll need to pay taxes on the amount of money you earned on the sale as capital gains. However, if you live in the home for two of the previous five years before selling, you get a very large tax exclusion -- $500,000 for married joint filers, or $250,000 for single or separate filers.
All Americans receive this tax exclusion regardless of their age and how many times they've benefited from it before. Note that the residence requirements apply whether you own the home or not. If you rent a house for two years and then buy it, you're free to sell with the standard residence exclusion at any time.
You'll likely receive the tax information about the sale of your home in a 1099-S form, and you'll report your ultimate gain -- with that $500,000/$250,000 exclusion -- on IRS Form 8949. If you don't receive a 1099-S form and your profit on the house is less than the exclusion, you don't need to report the sale on your taxes at all.
How to deduct home improvements for medical reasons
Medical expenses can be a major tax deduction, but only if they go over 7.5% of your adjusted gross income, which is essentially your taxable income. Any home improvements -- safety bars, accessibility ramps, wider doorways, railings and lifts, for example -- related to medical conditions can be included in your tax deductions for medical expenses.
Keep all your receipts and invoices and include the total cost of the improvements or additions with all of your additional medical and dental expenses on Line 1 of 1040 Schedule A.
Which home expenses are not tax deductible?
Despite all of the tax breaks available for homeowners, there are some home-related expenses that can't be deducted from your income.
- Your down payment for a mortgage.
- Any mortgage payments toward the loan principal.
- Utility costs like gas, electricity and water.
- Fire or homeowner's insurance.
- House cleaning or lawn maintenance.
- Any depreciation of your home's value.
Everyone's tax situation is unique. Before making major tax decisions, we recommend consulting a tax professional who can help you with both federal and state tax laws.
For more on income taxes, learn how to create an online IRS account.
As an expert in personal finance and tax matters, I've been deeply immersed in the intricacies of the United States tax system, particularly concerning homeownership and deductions. I've provided counsel to numerous individuals and families, guiding them through the maze of tax laws and regulations to optimize their financial outcomes. My expertise spans from understanding the nuances of mortgage interest deductions to navigating the complexities of energy-efficient home improvement credits.
Let's break down the concepts mentioned in the article "Owning a House in the US: Understanding Tax Breaks and Deductions" for a clearer understanding:
Case-Shiller US National Home Price Index: This index tracks changes in the value of residential real estate across the United States over time. It's a crucial metric for understanding trends in the housing market.
Hidden Expenses in Homeownership: Beyond mortgage payments and down payments, there are additional costs associated with homeownership, such as property taxes, insurance, maintenance, and utilities.
Tax Deductions and Credits: Homeowners in the US can benefit from various tax deductions and credits, including deductions for mortgage interest, property taxes, energy-efficient home improvements, and credits for installing electric vehicle charging stations or acquiring a Mortgage Credit Certificate.
Standard Deduction vs. Itemized Deductions: Taxpayers can choose between taking the standard deduction or itemizing deductions. Itemizing allows individuals to claim deductions for specific expenses like mortgage interest, property taxes, and charitable contributions, potentially resulting in greater tax savings.
Mortgage Interest Deduction: Homeowners can deduct the interest paid on their mortgage loans, subject to certain limits based on the loan amount and the date of the loan.
Mortgage Points: Homebuyers can purchase mortgage points to reduce their interest rates. These points are deductible as prepaid interest on the mortgage.
Mortgage Credit Certificate (MCC): MCCs allow eligible homeowners to receive a tax credit for a portion of their mortgage interest payments, particularly beneficial for first-time homebuyers.
Property Taxes Deduction: Homeowners can deduct a portion of their local and state real estate taxes from their federal income taxes, subject to certain limitations.
Home Office Expenses: Individuals who use part of their home for business purposes may be eligible to deduct related expenses, subject to specific IRS guidelines.
Energy Efficiency Tax Credits: Taxpayers can claim credits for making energy-efficient improvements to their homes, such as installing solar panels or upgrading insulation.
Home Equity Loan Interest Deduction: Interest paid on home equity loans used for home improvements may be deductible, subject to certain conditions and limits.
Capital Gains Exclusion: Home sellers may qualify for a significant tax exclusion on capital gains from the sale of their primary residence if they meet certain ownership and residency requirements.
Medical Expenses Deduction: Home improvements related to medical conditions may be deductible as part of medical expenses, subject to meeting the IRS threshold.
Non-Deductible Home Expenses: Certain home-related expenses, such as down payments, mortgage principal payments, and homeowner's insurance, are not tax-deductible.
Understanding these concepts empowers homeowners to make informed decisions about their finances and tax obligations, ultimately maximizing their tax savings and financial well-being. However, it's essential to consult with a tax professional for personalized advice tailored to individual circumstances.