Your home is likely the single most expensive purchase you’ll make in your lifetime, and you’re regularly reminded of your big buy with mortgage payments, monthly bills, property taxes, insurance and a string of other expenses. But at tax season, homeowners score a massive break with a series of tax benefits — in some cases, all of the perks from Uncle Sam could alleviate the taxes you owe or even lead to a big boost to your bank account.
These tax breaks apply to all types of homes and not just the conventional single-family house. If the roof over your head is a mobile home, townhouse, condominium, cooperative apartment or another dwelling you call home and have a mortgage contract on, these tax breaks are up for grabs. Turns out, homeownership isn’t just about calling the shots on decorating and evading rent increases — if you do your research and claim each tax benefit you’re eligible for, being a homeowner could get more money back into your pockets during tax season.
Here’s a thorough look at the various tax credits and deductions you should make use of.
Tax Housekeeping Notes to Start
As a homeowner, you’re doing some full-blown adulting with your tax refund. Bid farewell to the days of simply plugging in your W-2 information into a 1040EZ form — things are about to get much more complicated as you start itemizing your deductions and credits, and keeping on top of receipts and accounts to back up your tax claim.
When it comes to your taxes, there are deductions and credits. Credits are like coupons — they subtract from the sum of taxes you’ll have to pay. For example, if you owe $1,000 but you’re eligible for a $500 tax credit, you’ve essentially cut your taxes owed in half. On the other hand, tax deductions take away from your adjusted gross income, potentially bumping you to a lower tax bracket and reducing your tax liability.
Not everyone has to itemize their deductions. A standard deduction is how much you can reduce your taxable income, no questions asked, without having to itemize your return. Under the 2017 Tax Cuts and Jobs Act, the standard deduction was increased starting in 2018, meaning far fewer Americans need to itemize their returns to receive the maximum amount of money back on their taxes. The standard deductions were increased to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
The Tax Policy Center estimates that up to 27 million fewer people need to itemize their taxes because of this change, but that means another 19 million taxpayers will still benefit from doing so.
With these tax breaks below, it may be worth your while to itemize your taxes and capitalize on perks designed by the IRS to encourage buying real estate and sweeten the deal for homeowners.
The biggest payout you’ll receive on your taxes for being a homeowner is tied to your mortgage interest. All homeowners with a mortgage of up to $750,000 can deduct the interest paid on their loan if they’re married and file jointly. Single filers can write off up to $375,000. .
For tax years prior to 2018, homeowners can deduct interest on up to $1 million (or $500,000 if filing separately). The Tax Cuts and Jobs Act ushered in the reduced limits, which are slated to be in effect until 2026. If you’re not sure if your loan sits in the grandfathered category and it exceeds $750,000, double check with your lender or a tax advisor.
You also may be able to deduct the interest on a home equity line of credit of up to $100,000 when it is used to purchase or make improvements to your home.
Here’s how to claim your mortgage interest deduction: Your lender will send you a Form 1098 at the beginning of the year clearly listing the mortgage interest you paid during the previous year. This is the amount you’ll deduct on Schedule A (Form 1040).
Make sure to include the interest you paid on your home closing — the majority of the time, lenders include interest for the partial first month of your mortgage rolled into your closing. If it isn’t identified on your 1098, you can find it on your settlement sheet instead and add it to your total mortgage interest paid. Every little bit counts!
This deduction is especially lucrative for Americans with hefty mortgages. If you’ve just purchased a starter home for about $150,000 to $250,000, you likely paid about $6,000 to $10,000 in mortgage interest in your first year, which you can now deduct against your income. The deductions only escalate from there with more expensive homes.
While property taxes — or real estate taxes — are pesky, come tax season you can deduct this expense by up to $10,000. The $10,000 cap was introduced with the Tax Cuts and Jobs Act. Before then, homeowners were able to deduct the entire sum of their property taxes.
The latest rules combine your state and local taxes, which encompass your real estate taxes too, in your $10,000 cap. You can’t deduct foreign property taxes, which homeowners used to be able to do. This tax reform change could hurt homeowners who spend loads on property taxes but most should fall comfortably within the $10,000 cap.
The average American homeowner pays about $2,127 a year in property taxes, but this amount can easily double, triple or quadruple depending on the state you live in. We’re looking at you New Jersey, Connecticut and New York!
If you’ve paid your taxes directly to the municipality you live in, keep records, receipts and copies of checks for the payments you’ve made. If you paid your taxes through an escrow account or they’re rolled into your monthly mortgage payments and paid via your lender, you’ll see the total amount you’ve paid for this category on your Form 1098.
If you’re a new homeowner, chances are high the seller prepaid property taxes which you later reimbursed to them. Include this payment too; it’ll be on your settlement sheet.
When you took out your mortgage — either to buy a new house or to refinance your existing home loan — there’s a strong likelihood you paid “points” to your lender to help you secure your loan or snag a reduced interest rate.
Mortgage points are another fee homeowners pay for — conventionally, each point costs you about 1 percent of your home. For example, if you bought a house and need a mortgage of $250,000, one point would cost you $2,500. Your lender could charge you a single point, multiple points or no points, but regardless, any points you have paid for are eligible to be included as a deduction. The key here is that you have to have paid your lender for these points in the past year.
When you make a mortgage payment, if points are involved they’re built into the loan. Check with your lender, evaluate the breakdown of your mortgage payment and scan your 1098 form to tease out what this amount is. If your monthly payment includes $100 for points, your deductible for the year would be $1,200.
Private Mortgage Insurance
We all can’t cough up a 20 percent down payment when it’s time to buy a home. If you can’t pay one-fifth up front, you’ll need to buy private mortgage insurance (PMI) as a reassurance to your lender and to protect them in case you default on your loan. There’s a small silver lining to this added expense to homeownership: You can claim a tax deduction on your PMI payments if you took out your mortgage after 2007.
Current guidelines suggest that you can claim this deduction if your adjusted gross income comes in at $100,000 or less if you’re married or $50,000 if you’re single. Make sure to take advantage of this perk as it’s a deduction that may not last — turns out, it was one of 30 tax provisions that just eked through with an extension in 2018 and will likely be under review again.
In a push toward green energy, the IRS is rewarding homeowners who have made energy-efficient upgrades a priority in their homes with a handful of tax credits.
Under the residential energy-efficient property credit, any home improvements you undertake to boost energy efficiency come with a tax credit of up to 30 percent of the installation cost. Examples include solar energy panels and geothermal heat pumps. Upgrades made to your home before a resale are eligible too.
It’s worth noting that the longer you wait, the less money you’ll get to claim. Between January 1, 2017, and December 31, 2019, 30 percent of your expenditures tied to energy efficiency are eligible for the tax credit. But between January 1, 2020, and December 31, 2020, the tax credit decreases to 26 percent. By 2021, the credit is 22 percent before this credit is reevaluated.
Take a thorough look at energy.gov because tax credits, rebates and other incentives are plentiful but can be based on the state you live in. Not all energy-efficient upgrades and products are eligible for the tax credit. Before committing to anything, check for a manufacturer’s tax credit certification statement, which is usually in the product packaging or featured on the manufacturer’s website.
In some instances, you could get up to 10 percent of the cost of energy-efficient skylights, insulation systems, central air conditioners, furnaces and water heaters. These upgrades aren’t as ambitious as installing entire renewable energy systems, but they could make a significant dent on your taxes.
Remember, tax credits are pretty valuable — they essentially erase taxes you owe dollar-for-dollar.
New homeowners have it the easiest: It’s likely new builds are already fitted with green technology so they’re eligible for these tax credits without having to put in the legwork.
Home Office Expenses
Whether you’ve converted the spare room into your office space or you’re teaching piano lessons from the basement, any space used for working from home can be deducted as well. Right now, tax laws allow you to take a tax deduction of $5 per square foot for up to 300 square feet of office space for a total maximum deduction of $1,500. The guidelines are pretty stringent so they’re worth checking out carefully before adding this deduction. Deductions are limited solely to self-employed workers — your home office can’t be a spare bedroom or set aside for a dual purpose, and it must be used regularly as your principal workspace.
If you fit the criteria, you can write off a portion of certain living expenses that are tied to doing your job, such as your electric bill, Internet bill and homeowners insurance. You can even write off expenses like computer equipment and stationery.
Capital Gains from Selling Your Home
We’ve now documented the various ways in which homeownership can lead to several bonuses at tax time, but what most people don’t realize is that selling your property garners a decent tax break too. Because of the capital gains exclusion rule (or the home sale exclusion rule), Americans selling their home get to keep all of the profits without paying any taxes.
The only catch is that the property must serve as your primary residence for at least two of the five years prior to selling it. You can profit up to $500,000 if you’re married and $250,000 if you’re single tax-free. This is a major win, especially for those who make a pretty penny on their home sale. Across the board, most homeowners don’t have to pay any taxes on the profits they made from their sale.
If you didn’t live in the home for two of the five years prior to its sale, you’re still eligible for the home sale exclusion, but your deduction will be prorated instead. Partial exclusions can even be made if you had to sell your home early because of unforeseen circumstances from a change of employment or divorce.
Ultimately, this perk, along with the other deductions we’ve covered, could save you thousands of dollars at tax time and go toward the purchase of a brand-new home. And, of course, if you have any questions about whether you qualify for these tax perks, it’s always best to talk with a tax professional about your particular situation.