Owning a home transforms your tax situation significantly.
If you are a new homeowner, there are tax benefits that can add up quickly if you qualify, but the complex rules trip up many first-time filers. Knowing what to claim and how to document it makes all the difference.
1. Home office deductions require precision
If you work from home, you might qualify for home office deductions, but the rules are strict. The IRS scrutinizes these deductions carefully, so proper documentation is essential. "
A home office must be regular and exclusive, which means that you use that space for whatever business purpose on a regular basis, and that it is only used exclusively for that," said Keith Schroeder, tax expert and owner of The Wealthy Accountant blog.
Two main options exist for claiming this deduction. You can deduct actual expenses based on the percentage of your home used for business, which includes a portion of your mortgage interest, insurance, utilities, repairs, and depreciation. You can also use the simplified method, which allows you to deduct $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500.
2. Know the property tax deduction limits
Property taxes are deductible but capped under the State and Local Tax (SALT) limitation of $10,000. This limit includes all state and local taxes, including property taxes, state income taxes, and local income taxes. Even if you expect to itemize, do your math carefully. Bunching property tax payments might not provide the boost it once did, now that SALT is capped at $10,000 for both single and joint filers.
"You have to look at the state taxes as well," Schroeder said. "A mistake people can make is trying to use a federal deduction or credit. You have to look at the state that you're in and what the rules are, because you can actually lose more, or you can just be wasting your time."
3. Don't miss energy tax credits
The Inflation Reduction Act extended and expanded tax credits for energy-efficient home improvements. These credits can significantly reduce your tax liability while improving your home's energy efficiency. Key credits include up to 30% for solar panels and other renewable energy systems, up to $2,000 for heat pumps and biomass stoves, and up to $600 for windows and skylights. Unlike deductions that reduce your taxable income, these credits directly reduce your tax bill, making them particularly valuable.
4. Standard vs. itemized deduction
It’s easy to assume that once you own a house, you’ll automatically start itemizing. This is not always true. Standard deductions rose significantly in recent years, so many homeowners still find themselves taking that simpler route. “If you have a very expensive home, you might still be itemizing. For most people, the standard deduction is where you’re going to end up,” Schroeder said. Before investing hours rummaging through receipts, confirm whether you cross that threshold.
5. Understand mortgage interest deductions
The mortgage interest deduction remains one of the biggest tax benefits of homeownership, but limitations apply. This deduction allows you to reduce your taxable income by the amount of interest paid on your mortgage during the tax year. However, not all interest payments qualify, especially for high-value homes.
"If you have a large mortgage, the IRS is going to know because it's reported on Form 1098," Schroeder said. "You might think that you paid X amount of dollars in interest, but it might not all qualify for the mortgage interest deduction."
The deduction is capped on mortgage debt up to $750,000 for homes purchased after December 15, 2017. For those with more expensive homes, a portion of your interest payments may not be deductible. The IRS receives your mortgage interest information directly from your lender, so accuracy is crucial when reporting these deductions. Check your Form 1098 from your lender, which reports how much interest you paid.
6. Create a tax-ready filing system
Make sure you are ready for every tax season and start organizing your home-related documents now. Keep digital or physical folders for mortgage statements, property tax bills, home improvement receipts, and home office expenses.
This simple step can save countless hours of frustration and prevent missed deductions from lost paperwork. Pay particular attention to receipts for significant home improvements, which can affect your tax basis when you eventually sell.
7. Be careful about tax advice sources
Not all tax advice is created equal, especially online. Social media platforms often circulate tax tips that are oversimplified, outdated, or completely incorrect.
"You've got to make sure that you're not taking strategies you saw in a TikTok video, because they may not work," Schroeder said.
Trust the experts
Homeownership brings valuable tax benefits, but the rules are complex. When in doubt, consult a qualified tax professional who can provide guidance specific to your situation and help you navigate the intricacies of homeowner tax benefits.
Michael Letendre
Michael Letendre is a writer for NewHomeSource and Builder Magazine.