The Comprehensive Guide to Tax Benefits of Owning a Home

What will happen to your taxes when you own a home? A lot. Homeownership comes with plenty of benefits beyond the security and comfort of having a house. There are also financial benefits of owning a home, like building a source of generational wealth, saving money on a mortgage vs. rent, and tax credits and deductions. However, some homeowners overlook these tax benefits, whether it's because itemizing deductions is time-consuming, they prefer the standard tax deduction, or they're simply unaware.

Knowing which tax benefits of owning a home apply to your situation helps you determine whether it’s more advantageous to itemize deductions or simply claim the standard deduction. Review the common tax credits and deductions for homeowners listed in this guide, see if they apply to you, and calculate how much of a deduction each tax break could provide you. Then compare it to how much your standard deduction would be. If your itemized deductions are larger than the standard deduction, you may want to itemize your deductions. (It’s a good idea to do budget planning throughout the year and keep records of your expenses to know if this is worthwhile.) While the deductions will change each year, the 2023 tax year standard deductions are:

• Single individuals and married couples filing separately: $13,850
• Married couples filing jointly: $27,700
• Heads of households: $20,800

Note: These numbers are from 2023, and while we think they provide value, keep in mind they will change from year to year. It’s important to talk to a tax professional before making any decisions on a home purchase.

Key Tax Deductions for Homeowners

There are a few things to keep in mind when determining how much deductions could save you during tax season. First, be aware that you'll have to itemize your deductions to take advantage of the following tax breaks. Second, the value of these deductions generally needs to be multiplied by your marginal tax rate to determine your true deduction amount.

1. Property/Real Estate Taxes

No matter where you live, paying local and state property taxes is an essential part of homeownership. However, single homeowners can receive a deduction of up to $5,000 dollars on their real estate or property tax payments and state/local income tax. Married couples filing jointly can receive a deduction of up to $10,000.

2. Mortgage Interest

Finding the lowest mortgage interest rate from a lender is typically a top priority for homebuyers, but less-than-ideal rates have one upside — a tax deduction for mortgage interest. Single homeowners and those who are married and filing jointly can deduct up to $750,000 of annual interest payments, and married couples filing separately can deduct up to $375,000 each for mortgages taken out after Dec. 16, 2017. For earlier mortgages, the numbers are larger. Consult a tax professional or the IRS rules on what you may be allowed to deduct. Your mortgage servicer will send a Form 1098 annually showing how much interest you paid.

Keep in mind that this tax deduction for homeowners doesn't apply to the overall mortgage payment, only the interest amount, and there are a couple of caveats you may want to speak with a tax pro about.

3. Mortgage Discount Points

Before you finalized your mortgage agreement with your lender, you may have purchased discount points that lowered your interest rate. One discount point equals 1% of the total mortgage amount. If you bought points, you could deduct the one-time fee you paid for discount points in that year and, in some cases, over the life of your loan. Additionally, a home seller will sometimes purchase them for a homebuyer instead of lowering the sale price of a property, and these may be deductible for the buyer. Check the tax code in your local area and state to learn whether tax deductions on discount points can only be applied the year they were purchased or extended into the future.

Note: Discount points and loan origination points may seem similar, but the latter can't be deducted from your taxes.

4. Private Mortgage Insurance

Some mortgage lenders require you to purchase private mortgage insurance — or PMI — if your down payment is less than 20%. If the loan can't be repaid to the lender, the insurance will pay the remainder of the balance due. These insurance payments may also be deducted for certain tax years. Tax law on this subject has changed multiple times in recent years. Make sure you consult an expert for your specific tax situation.

5. Home Equity Loan/HELOC

One of the most rewarding benefits of owning a home? Making your house your own unique space. But sometimes, homeowners may want to seek out less conventional loans to pay for home improvement projects. Like mortgage interest, interest payments for home equity loans and home equity lines of credit are tax deductible, but only if the money is used to pay for making substantial improvements to the home. There are several other important stipulations concerning whether this type of loan interest qualifies for a deduction and how much can be deducted, including the loan amount and age. Consult the IRS guidelines surrounding these deductions before itemizing them on your taxes.

Related: Learn about the differences between home equity loans and HELOC.

6. Home Office

This tax benefit of owning a home can only be claimed by people with a dedicated office in their home that's used as a primary location for their own business. It can't be deducted by people who work from home for a company and have an office in their residence or who use their home office for other purposes. However, it can apply to separate structures on the property used for a self-run business, even if it's not the primary business location. If your home office does meet the requirements, the amount you can deduct depends on the square footage of the office. Again, consult the IRS or a tax professional to determine if this potential deduction applies to your situation.

7. Accessibility Improvements

Some home improvements are medically necessary, like installing accessibility ramps, handrails, lifts, and essential medical equipment. You can claim amounts that surpass 7.5% of your adjusted gross income, but any value these necessary improvements add to your home can't be deducted.

Tax Credits for Homeowners

Unlike deductions, credits are tax benefits of owning a home that don't require itemizing your return and aren't determined by your marginal tax rate. The tax credit amount you receive directly contributes to your tax balance for the year. Some examples of tax credits you can receive include:

• Mortgage credit certificates
• Heating and cooling tax credits
• Residential clean energy tax credits
• Home audit incentive tax credits
• Building products tax credits
• Clean energy improvement tax credits

Mortgage credit certificates are sent through the mail after finalizing your loan, but you can learn online if you qualify for clean energy tax credits.

Do You Get a Tax Break for Buying a House?

Currently, there is no program in place to provide a tax break for homebuyers, but you can receive tax benefits from selling a home.

You can also receive tax benefits when selling a home. If you’ve lived in the home for at least two of the last five years, single filers don't have to pay taxes on the first $250,000 of home sale profit ($500,000 if married and filing jointly). This profit is called capital gain and is protected by the home sale exclusion.

Reinvesting in Budget Protection

There are many fun uses for the tax benefits of owning a home you accrued during the year, but many homeowners choose to use extra money from deductions and credits to strengthen their home budget. And when you discover what your home warranty could cover in regard to repairs and replacements of crucial appliances and systems throughout the year, you'll see why it's a popular use for tax refunds. Get a free home warranty quote and learn more about the home warranty service process to decide if reinvesting your refund in budget protection is a savvy financial decision for your household.

FAQs

Do you get more taxes back if you're a homeowner?

It depends on your specific situation and what deductions and credits you're qualified to claim. In most cases, tax deductions for homeowners are a fraction of what is spent on qualifying events and situations. But combined with the equity you gain with each mortgage payment, tax benefits of owning a home can add up over time to help mitigate costs. Homeownership is a big financial responsibility, so keep in mind it's rare to get more taxes back than what you've spent on maintaining and improving your home.

Does having a mortgage help with taxes?

Yes. Mortgage interest payments are tax deductible but only if you itemize your return; however, you can't deduct other types of home loan payments. If you need a loan to purchase a home, a mortgage loan is the preferred method from a tax perspective.

The contents of this article are provided for general guidance only. Make sure you consult an expert for your specific tax situation.