7 Top Tax Deductions for Homeowners

One of the nice things about owning a home is that you may be able to offset some of the annual cost with a variety of tax deductions. These tax deductions can save you money by reducing your taxable income, which means you pay less in income tax.¹ Depending on your situation, tax deductions for homeowners may save you thousands of dollars each year.²    

A note of caution: you can only take advantage of these tax breaks if you “itemize” – claim each deduction separately – on your tax return.² It may be worth itemizing your deductions if they add up to more than the IRS standard deduction, which you automatically get if you don’t itemize. For the 2022 tax year, the standard deduction is $12,950 if you’re single, or $25,900 for married couples filing together.³  

Talk to your tax professional for advice about what you can deduct and whether it makes sense to itemize your deductions. If itemizing seems worth it, start gathering the information you’ll need to maximize your tax savings. Here are six  tax deductions for homeowners:

• Mortgage interest.
• Mortgage “points” (a type of mortgage fee).
• Property taxes and some local taxes.
• Interest on home equity loans.
• Tax exemptions on profits when you sell your home.
• Mortgage Insurance.
• Home office.

You can deduct up to $10,000 of your total payments each year for property taxes, state income tax, or state and local sales tax.² You need to claim the deduction during the year the taxes were actually paid.⁴ If, like many homeowners, you pay your property taxes in installments into an account held by your mortgage lender, you can only deduct the property taxes when the money in the account is used to pay them.² The $10,000 limit applies whether you’re single or married filing jointly; the amount is $5,000 for married taxpayers filing separately.²

When you buy a home, you may have the option of paying extra fees in the form of mortgage points at the time of the purchase, usually in return for a lower mortgage interest rate.⁵ One point equals 1% of the total loan amount.¹⁵ The IRS treats points as prepaid mortgage interest and lets you deduct them accordingly.⁵ You may be able to deduct the full amount of the points during the year that you paid them, which could shave thousands of dollars off your taxable income.⁵ But in some situations, such as when refinancing your mortgage, you generally have to spread out the deduction over the life of the loan.⁶                   

If you get a home equity loan – a type of second mortgage – you may be able to deduct the interest you pay, as part of your mortgage interest deduction.⁷ You can claim the deduction if you use the loan to buy, build, or improve your primary or second home.⁶ The amount of the loan counts toward your total mortgage interest deduction limit.²

The tax benefits of home ownership continue when you sell your home, because you may be able to avoid paying capital gains tax on much of the profit. Capital gains tax is the tax that’s generally charged when you sell assets at a profit or “gain.”⁸ But when you sell your home – which may be your single biggest asset – you don’t have to pay capital gains tax on the first $250,000 of your profit, or $500,000 for a married couple.⁹ That can be a big plus, since real estate generally appreciates in value over time.  

There are conditions, however. For example, you must have used the home as your primary residence for two out of the past five years.⁹ And calculating the profit and any tax liability can get complicated. The profit isn’t simply the difference between what you paid for the house and what you sold it for.¹⁰ You also need to include other factors, such as some of the costs of purchasing and selling your home, and any spending on major improvements.¹⁰ You’ll generally need to consult a tax professional for help figuring it out.

If you’re self-employed and you use part of your home exclusively for your business, you may be able to deduct some related expenses – whether you rent or own. There are two ways to do this:

• Simplified option. You can deduct $5 per square foot of the area used for business, up to a maximum of 300 square feet (the IRS calls this the simplified option).¹¹
• Regular method. You deduct the actual home office expenses.¹²  

The regular method is more complicated, as you might expect. You need to track and add up various costs of running your entire home, such as homeowner insurance, utilities, repairs, and property taxes.¹² Then you deduct a percentage of those costs depending on the area dedicated to your business.¹³ For example, if your home is 2,000 square feet and your home office is 200 square feet, you may be able to deduct 10% of the allowable home costs.                   

You can’t deduct all the costs of running your home. For example, you generally can’t deduct any of the cost of homeowner insurance or day-to-day repairs (unless you have a home office and are incorporating them into your calculations using the regular method).² Major home improvements generally aren’t deductible, although the money you spent on them may help to reduce your capital gains tax if you sell your home.¹⁰