The IRS has extensive rules about the tax breaks available for homeowners. Let’s dive into the tax breaks you should consider as a homeowner.
1. Mortgage Interest
If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest.
In the past, homeowners could deduct up to $1 million in mortgage interest. However, the Tax Cuts and Jobs Act has reduced this limit to $750,000 as a single filer or married couple filing jointly. If you are married but filing separately, the deduction limit is $375,000 for each party.
2. Home Equity Loan Interest
A home equity loan is essentially a second mortgage on your house. With a home equity loan, you can access the equity you’ve built in your home as collateral to borrow funds that you need for other purposes.
Like regular mortgage interest, you can deduct the interest you’ve paid on home equity loans and home equity lines of credit. However, you can only claim this deduction if you used the borrowed funds to pay for a home improvement. Prior to the Tax Cuts and Jobs Act of 2017, you could deduct the interest on these loans regardless of how you spent the funds.
3. Discount Points
When you take out a mortgage, you may have the option to purchase discount points to lower your interest rate on the loan. If you have this option, one discount point will equate to 1% of the mortgage amount.
If the points are purchased to reduce the mortgage’s interest rate, you can deduct the cost of the discount points. However, ‘loan origination points’ will not be tax deductible because these are fees that don’t affect the interest rate of your loan.
4. Property Taxes
As a homeowner, you’ll face property taxes at a state and local level. You can deduct up to $10,000 of property taxes as a married couple filing jointly – or $5,000 if you are single or married filing separately.
Depending on your location, the property tax deduction can be very valuable.
5. Necessary Home Improvements
Necessary home improvements can qualify as tax deductions. Of course, the definition of “necessary” is somewhat limited. If you upgrade your fully functioning kitchen, those improvement costs may not qualify.
However, if you have to make permanent improvements to make your home more accessible for medical reasons, that should qualify. A few examples might include installing medical equipment, railings or widening doorways for an accessible home.
6. Home Office Expenses
If you operate a business in your residence, you may be able to deduct some of the expenses of maintaining that space. The IRS requires that you use your home office for regular and exclusive business use in order to qualify for a deduction. If you only use the office space when it is convenient, or just for working from home for your employer, that will not qualify.
In terms of the deductions, the size of the deduction is based on the percentage of your home dedicated to the place of business.
7. Mortgage Insurance
Private mortgage insurance, or PMI, is another expense that many homeowners must factor into their budget. PMI is there to protect your lender if you are unable to continue making payments on your mortgage.
You can deduct your mortgage insurance payments on your itemized tax return.
8. Capital Gains
Capital gains tax breaks come into play when you sell your home for a profit. The capital gain is the difference between the value of the home when you bought it and when you sold it. For example, let’s say you bought your home for $100,000. A few years later, you sell your home for $150,000. With that deal, you walk away with a capital gain of $50,000.
If you used the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation. As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.
The key is that you lived in the house for 2 of the last 5 years. With a big tax break on the table, it’s important to take the rules that apply to this deduction seriously.
FAQs
8 Tax Breaks For Homeowners
- Mortgage Interest. If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. ...
- Home Equity Loan Interest. ...
- Discount Points. ...
- Property Taxes. ...
- Necessary Home Improvements. ...
- Home Office Expenses. ...
- Mortgage Insurance. ...
- Capital Gains.
What does the IRS allow you to deduct (or “write off”) without receipts?
- Self-employment taxes. ...
- Home office expenses. ...
- Self-employed health insurance premiums. ...
- Self-employed retirement plan contributions. ...
- Vehicle expenses. ...
- Cell phone expenses.
You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.
What is the most property tax you can deduct? ›
As of 2021, California property owners may deduct up to $10,000 of their property taxes from their federal income tax if they are filing as single or married filing jointly. Unfortunately, any property taxes you have paid in excess of $10,000 cannot be counted toward your deduction.
What home bills are tax deductible? ›
If you're eligible, you may be able to deduct a portion of your homeowners association fees, utility bills, homeowners insurance premiums and the money you used to repair your home office. The amount you can deduct depends on several factors, including the percentage of your home that's used exclusively for business.
What utilities are tax deductible? ›
Monthly Utility Expenses: Your utilities are a standard operating expense for your investment property. Utilities that are deductible include water, sewer, trash, electric, regular pest control, pool maintenance costs and landscaping.
What percentage of my phone bill can I claim on tax? ›
If 30% of your time on the phone is spent on business, you could legitimately deduct 30% of your phone bill. In Entrepreneur magazine, writer Kristin Edelhauser recommends getting an itemized phone bill, so you can measure your business and personal use and prove your deduction to the IRS.
Can I deduct health insurance premiums? ›
If you buy medical coverage through an insurance marketplace, your premiums are deductible as a medical expense. But if you are eligible for a spouse's employer-based health insurance and decline that coverage, you cannot deduct your personal insurance premiums on your return.
What percentage of my Internet bill can I deduct? ›
To be able to deduct your internet bill, calculate the percentage of the time spent on business activities and use that as your baseline. So if your internet bill comes to $80 a month and you figured out that you spend about 50% of your time online for your business, you can deduct half that amount.
Can I deduct mortgage insurance premiums? ›
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible now. The mortgage insurance deduction was only available for eligible homeowners for the 2018–2021 tax years.
You can deduct mortgage interest, property taxes and other expenses up to specific limits if you itemize deductions on your tax return. Barbara Marquand is a former NerdWallet writer covering mortgages, homebuying and homeownership, insurance and investing.
Is house insurance tax-deductible? ›
Some taxpayers have asked if homeowner's insurance is tax deductible. Here's the skinny: You can only deduct homeowner's insurance premiums paid on rental properties. Homeowner's insurance is never tax deductible your main home.
Is car insurance tax deductible? ›
Car insurance is tax deductible as part of a list of expenses for certain individuals. Generally, people who are self-employed can deduct car insurance, but there are a few other specific individuals for whom car insurance is tax deductible, such as for armed forces reservists or qualified performing artists.
What can I write off on my taxes? ›
If you itemize, you can deduct these expenses:
- Bad debts.
- Canceled debt on home.
- Capital losses.
- Donations to charity.
- Gains from sale of your home.
- Gambling losses.
- Home mortgage interest.
- Income, sales, real estate and personal property taxes.
Answer and Explanation: The gasoline taxes paid on personal travel cannot be itemized.
Can I write off a home purchase on my taxes? ›
As a newly minted homeowner, you may be wondering if there's a tax deduction for buying a house. Unfortunately, most of the expenses you paid when buying your home are not deductible in the year of purchase. The only tax deductions on a home purchase you may qualify for is the prepaid mortgage interest (points).
What closing costs are tax deductible IRS? ›
Typically, the only closing costs that are tax-deductible are payments toward mortgage interest, buying points or property taxes. Other closing costs are not. These include: Abstract fees.
How much money do you get back on taxes for mortgage interest? ›
How much mortgage interest can I deduct from my taxes? You can deduct the interest you paid during the tax year on the first $750,000 of your mortgage, according to the IRS. For married couples filing separately, the limit is $375,000, If you took out your mortgage between Oct.
Is homeowners insurance tax deductible? ›
Some taxpayers have asked if homeowner's insurance is tax deductible. Here's the skinny: You can only deduct homeowner's insurance premiums paid on rental properties. Homeowner's insurance is never tax deductible your main home.
