Depending on your situation, the tax rules associated with homeownership can help reduce the amount of income tax you owe when filing, thanks to a combination of deductions and credits. Deductions lower your taxable income, while tax credits can directly reduce the amount you owe after your taxable income has been determined.
Whether you’re filing as a homeowner for the first time, after a recent refinance, or following the sale of a home, it’s essential to be aware of the tax deductions available to homeowners as the filing deadline approaches.
Important Note:
Tax outcomes can vary depending on your unique circumstances. This article is intended for informational purposes only and does not serve as tax advice. It’s recommended that you consult a tax professional or certified public accountant to understand how these and other tax implications apply to your situation.
Standard vs. Itemized Deductions
When you file your taxes, you have two options that determine whether you owe money or are entitled to a refund: taking the standard deduction or itemizing your deductions by adding up the expenses you’re allowed to deduct.
The standard deduction reduces your taxable income by:
- $13,850 if you’re filing as an individual
- $20,800 if you’re filing as a head of household
- $27,700 if you’re married and filing jointly
If your allowable expenses exceed the standard deduction, it may be beneficial to itemize.
Typically, your mortgage will only impact your taxes if you choose to itemize, and the total deductions, including mortgage interest, exceed the standard deduction.
Note: If you previously took the standard deduction but refinanced to a higher mortgage rate in 2023, you might find that itemizing is now more advantageous due to increased interest payments. Conversely, if you refinanced to a lower rate, you might benefit more from the standard deduction.
Tax Deductions for Homeowners
Here are some tax deductions available to homeowners who choose to itemize:
1. Mortgage Interest Deduction
If you financed a home purchase in 2023 or increased your mortgage through a cash-out refinance, itemizing could allow you to deduct mortgage interest. Those who itemize can deduct interest on mortgage debt up to $750,000 by filing IRS Form 1040 with a Schedule A. For married couples filing separately, the deduction is capped at $375,000. For mortgages obtained before December 16, 2017, the limit is higher: $1 million for individuals or $500,000 for married couples filing separately.
2. Second Home or Vacation Home Interest Deduction
Mortgage interest on a second or vacation home can also be deducted, provided the total mortgage interest deduction across all properties doesn’t exceed the $750,000 limit. The IRS defines a qualified home as a main or second home, which could include a house, condo, mobile home, or even a boat, as long as it has sleeping, cooking, and toilet facilities.
3. Property Tax Deduction
Property taxes, which are based on your home’s value, are also tax-deductible up to $10,000 in combined state and local taxes. If you’re married and filing separately, the deduction is capped at $5,000 per person.
4. Home Equity Loan Interest
If you took out a home equity loan and used the funds for home improvements, or if the combined mortgage and home equity loan total doesn’t exceed $750,000, the interest on this loan may also be deductible.
5. Mortgage Points and Origination Fees
If you paid origination fees or discount points when securing a mortgage in 2023, these may be considered prepaid interest and could be deductible if you itemize.
6. Capital Gains Exclusion
When selling your primary residence, you may exclude up to $250,000 in profit from your taxable income ($500,000 for married couples filing jointly), provided you’ve lived in the home for at least two of the last five years.
Home Improvements and Tax Implications
While home improvements aren’t deductible in the year they’re made, they can help reduce taxes when you sell your home. Capital improvements, which add value, new uses, or extend the life of your home, can reduce the tax burden on any profit made from the sale.
Tax Credits for Homeowners
Unlike deductions, tax credits reduce the amount you owe on your taxes, regardless of whether you itemize. Some available credits include:
1. Mortgage Interest Tax Credit
Available to first-time homebuyers through the Mortgage Credit Certificate Program, this credit allows homeowners to claim a portion of their annual mortgage interest, up to $2,000.
2. Energy Efficient Home Improvement Credit
This credit covers 30% of the cost of energy-efficient upgrades, such as heat pumps, insulation, and energy-efficient doors and windows, up to specific limits.
3. Residential Clean Energy Property Credit
Homeowners who install clean energy equipment, like solar panels or wind turbines, can claim a 30% tax credit on the cost and installation.
Nondeductible Expenses
Certain expenses, such as private mortgage insurance, title insurance, and homeowners insurance premiums, are generally not tax-deductible. Additionally, down payments, utilities, and principal mortgage payments do not qualify for deductions.
For more detailed information and guidance on tax breaks for homeowners, consult your tax advisor or visit the IRS website.