7 Top Tax Deductions for Homeowners

One of the biggest tax breaks for many homeowners is the ability to deduct mortgage interest every year. You can deduct the interest you paid during 2021 on up to $750,000 of mortgage debt if you took out the mortgage after December 15, 2017, or up to $1 million in debt if you got the mortgage earlier than that. You can claim the deduction whether it’s your first or second home, and whether it was used to buy, build or improve the home. These limits apply to single taxpayers and married taxpayers filing jointly; the maximums are halved for married taxpayers filing separately.¹

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. You need to claim the deduction during the year the taxes were actually paid. 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. The $10,000 limit applies whether you’re single or married filing jointly; the amount is $5,000 for married taxpayers filing separately.

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. One point equals 1% of the total loan amount, and one to three points are common on home loans. The IRS treats points as prepaid mortgage interest and lets you deduct them accordingly. 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. But in some situations, such as when refinancing your mortgage, you generally have to spread out the deduction over the life of the loan.²

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. You can claim the deduction if you use the loan to buy, build, or improve your primary or second home. The amount of the loan counts towards your total mortgage interest deduction limit.

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.” 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. 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. 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. 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.³ You’ll generally need to consult a tax professional for help figuring it out.

Lenders may require you to pay private mortgage insurance, especially if your down payment was less than 20% of the purchase price. Mortgage insurance is designed to protect lenders against default. The rules about whether you can deduct mortgage insurance have changed several times. Most recently, Congress made mortgage insurance premiums deductible once again, at least through 2021. Deductions begin to phase out if your adjusted gross income is over $100,000.

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).
• Regular method. You deduct the actual home office expenses.

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. Then you deduct a percentage of those costs depending on the area dedicated to your business. 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). 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.

None of the existing tax deductions are set in stone, because – as the private mortgage insurance example shows – tax deductions for homeowners change fairly frequently. The current limits for mortgage interest, property taxes and home equity loans were set in 2017, as part of the Tax Cuts and Jobs Act, for instance. Make sure you get the latest information from your tax professional before making assumptions about homeowner tax deductions each year.

The Takeaway