Tax Breaks for Homeowners

calendar_month April 19, 2023

Discover homeowner tax deductions that may save you money during tax season for simply owning a home.

In this article:

Owning a home has its rewards and challenges — and that’s especially true at tax time.

Depending on your circumstances, tax rules around homeownership can reduce the amount of income taxes you owe at filing time. This is through a combination of tax deductions and tax credits. Tax deductions lower taxable income. Tax credits lower the amount of taxes you owe after your taxable income has been established — that is, after you’ve taken the allowable deductions.

Whether you’re filing taxes for the first time as a homeowner, filing after a recent refinance or just sold a home, read below to review some of the tax deductions for homeowners as the filing deadline approaches.

Disclaimer: Tax results can vary based on your specific set of facts and circumstances. Consult with a tax professional or certified public accountant to determine how these and other tax ramifications apply to you.

Standard vs. itemized tax deductions

When you file taxes as an individual taxpayer or a married couple, you have two choices that help determine whether you owe or are owed money from the federal government. You can take the standard deduction, or you can itemize by adding up the expenses you’re allowed to deduct from your income.

Taking the standard deduction will reduce your taxable income by:

$12,950 if you’re filing as an individual
$19,400 if you’re filing as a head of household
$25,900 if you’re married and filing a joint return

If the expenses you’re allowed to deduct add up to more than the standard deduction, it makes sense to itemize.

Generally, your mortgage will only come into play on your taxes if you itemize deductions, and the total amount of the deductions — including mortgage interest — amounts to more than the standard deduction.

Note: If you previously took the standard deduction but refinanced into a higher rate mortgage on the same amount or larger in 2022, you will have paid more interest than the previous year and may find that itemizing is the better option. If you were previously itemizing your deductions and refinanced into a lower rate mortgage on the same amount, you will be paying less interest on the loan so you may find that the standard deduction is a better option this year.

Here are some of the tax deductions available to homeowners and home buyers who are itemizing their taxes.

7 tax deductions for homeowners

1. Mortgage interest deduction

If you financed a home purchase in 2022 — or increased the size of your mortgage with a cash-out refinance — it could be worthwhile to itemize to capture the mortgage interest deduction. The only way to tell is to add up all of your deductions to see if they amount to more than the standard deduction.

Those who itemize can deduct mortgage interest on up to $750,000 of mortgage debt by filing IRS form 1040 with a Schedule A to itemize deductions. (The mortgage deduction is half that — $375,000 — for married taxpayers who file separately. For mortgage debt incurred before December 16, 2017, the limit is $1 million or $500,000 if married and filing separately, according to the IRS.)

second home or vacation home

2. Deductions for a second home or vacation home

Mortgage interest from a second home can be deducted provided that the total mortgage interest deduction for your primary home and second/vacation home doesn’t exceed the $750,000 limit.

The IRS defines a qualified home as a main or second home that can be a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities. A main home is the place where you ordinarily live most of the time. The IRS has two definitions for second homes:

A second home that is not rented out: If the home is not up for sale or rent to others at any time during the year, you can treat it as a qualified home and you do not necessarily have to use it during the year.
A second home that is rented out: If the home is rented out for part of the year, it must also be used as a home for a portion of that year to qualify for the deduction. The home must be used for a minimum of 14 days or 10 percent of the number of days that the property is rented out, whichever is longer. If the property is not used long enough the IRS classifies it as rental property.

3. Property taxes

Property taxes — the annual tax you pay based on the value of your property — are also tax deductible up to a point. You can generally deduct up to $10,000 in combined state and local income, sales and property taxes for all properties owned. If you’re married and filing separately, you and your spouse can each deduct $5,000.

4. Home equity loan

A home equity loan is a second mortgage on a home that gives homeowners funds they can use for any reason, including large expenses or to consolidate higher-interest rate debt on other loans or credit cards. If you used the money from the loan to pay for home improvements or if the combined total of your first mortgage balance, and your home equity loan doesn’t exceed $750,000, interest on your second mortgage may be tax-deductible for homeowners.

5. Mortgage points and origination fees

Any origination fees and/or discount points you paid in association with a new mortgage in 2022 are considered prepaid interest and may be deducted if you itemize your deductions. Your closing documents will show what you paid in origination fees and points.

6. Mortgage insurance on your primary home

You may be able to deduct private mortgage insurance premiums (PMI) as an itemized deduction.

Households with adjusted gross incomes (AIG) of $100,000 or less are allowed to deduct 100% of their mortgage insurance premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, and is not available to households with earnings over $109,000.

Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their mortgage insurance premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500.

7. Capital gains from selling a home

If you sold your main home and made a profit, you may be able to exclude that profit from your taxable income. Here’s how it works:

Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple filing jointly) as long as you have owned the home and lived in it for a minimum of two years. The two years do not have to be consecutive. As long as you live in the house as your principal residence for at least 24 months in the five years prior to the sale, the deduction applies.

Generally, you can claim the exclusion only once every two years. Some exceptions do apply.

If you lived in your home less than 24 months, you may be able to exclude a portion of the gain. Exceptions are allowed if you sold your house because the location of your job changed, because of health concerns or for some other unforeseen circumstance.

What to know about home improvements and tax deductions

Home improvements themselves are not deductible the year you incur them. However, some home improvement expenses could help you lower the tax you owe when you sell your home. Only capital improvements may reduce taxes after you sell. Capital improvements are ones that add value to your home or prolong the life of your home. Home repairs that do not prolong the life of the home cannot reduce taxes owed on the sale.

The tax savings would apply only if you make more than $250,000 on the sale of your home as an individual or $500,000 as a married couple. Be sure to track expenses and receipts, especially for big ticket items that could lower your tax burden later on.

3 tax credits for owning a home

Unlike tax deductions, which require you to itemize in order to reduce your taxable income, tax credits reduce the amount you owe on that income regardless of whether you itemized deductions. In some cases, the credit can also result in a refund.

1. Mortgage interest tax credit

This tax credit is available to first-time home buyers who participated in the Mortgage Credit Certificate Program, a homebuyer assistance program administered by state and local housing finance agencies. The program seeks to make housing more affordable for low to moderate income buyers.

Under the program, homeowners can claim a portion of the mortgage interest they pay annually, up to $2,000. The rest of the mortgage interest can still be itemized as a deduction, according to the National Council of State Housing Agencies.

2. Energy efficient home improvement credit

The energy efficient home improvement credit — one of two tax credits available for home energy improvements — allows homeowners to claim a total of $500 for all qualified energy improvements made from 2005 through Dec. 31, 2022. The credit still has a lifetime cap for 2022. This means that a homeowner can only deduct up to $500 for qualified improvements made during those years. (Beginning in 2023, the credit becomes annual and homeowners can generally claim up to $1,200 a year for certain qualified expenditures.)

Homeowners may be able to take a credit equal to 10% of the costs of certain energy improvements installed in 2022, and qualified energy equipment you paid for or incurred in 2022. (Beginning in 2023, that will increase to 30%.)

Limits apply to each type of improvement. For instance, the total credit for new windows installed after 2005 is $200 while the credit for certain qualified furnaces is $150. For details on what is covered by this credit and in what amounts, visit the IRS.gov website.

Some of the qualified expenditures include:

Exterior doors, windows and skylights
Insulation and air sealing materials or systems
Electrical improvements made to accommodate energy efficient components such as heat pumps

3. Residential clean energy property credit

The residential clean energy property credit gives homeowners a 30% tax credit for the cost and installation of certain qualified expenditures.

Expenditures eligible for the credit include:

solar panels
solar water heaters
wind turbines
battery storage technology
Geothermal heat pumps

Fuel cell technology also is covered. Credit is capped at $500 for each half kilowatt of capacity.

Nondeductible expenses when buying and owning a home

Mortgage insurance is not deductible for second homes or rental properties.

Typically the costs you paid to third parties for such things as title insurance, appraisal fees, recording fees, etc. are not tax-deductible. Other non-deductible expenses:

Down payment costs
Utilities such as gas and water
Principal mortgage payments (the share of the payment that is not interest)
Homeowners insurance premiums

Additional resources for tax information

While we’ve highlighted a lot of the key tax breaks for homeowners, you can find answers to more specific questions by contacting your tax advisor or visiting the IRS website. We’ve included a few helpful resources below to help get you started:

An overview of tax deductions and credits.
Answers to tax law questions.

Tax Breaks for Homeowners

Nesrin Karam Homes Group

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