Seven tax benefits for homeowners
Learn about common benefits, including deductions, credits, and exclusions, that could help you maximize federal tax savings as a homeowner.
Learn about common benefits, including deductions, credits, and exclusions, that could help you maximize federal tax savings as a homeowner.
Homeownership can provide financial stability through predictable monthly mortgage payments, as well as the opportunity to build wealth as home equity grows over time. However, owning a home also comes with associated costs. There are fortunately tax benefits designed to lessen the financial burden for qualifying recipients. Read on to learn about common benefits, including deductions, credits, and exclusions, that could help you maximize federal tax savings as a homeowner.
Tax deductions are certain expenses during a tax year that, if you qualify for them, can get subtracted from taxable income to help reduce the amount of federal taxes you owe. In order to claim a deduction, you need to itemize deductions on Schedule A (Form 1040 or 1040-SR) versus claiming the standard deduction.
Tax credits, compared to deductions, allow you to subtract a specific dollar amount directly from the federal taxes you owe. Some credits are nonrefundable, meaning they’ll only let you reduce your owing balance to $0, while others are refundable and may let you apply them to get a refund. Also, each credit has specific qualifications that must be met to claim it.
Tax exclusions can enable you to exclude certain income from your gross income, making it exempt from taxation. Publication 525 from the IRS discusses various types of exclusions. Like with deductions and credits, qualification criteria must be met for these as well.
Now that we've covered the basics of tax deductions, credits, and exclusions, let's take a look at some common options that homeowners use to lower their tax bill. These benefits might be available to you as well.
1. Capital gain exclusion:
Any home you own—including your primary residence, a second home, or an investment home—is considered a capital asset to the Internal Revenue Service (IRS). And it’s a capital asset with a value that may appreciate over time. Then, if you sell your home, the profit (amount that it appreciates above the price you purchased it for) is considered a capital gain. If you make a capital gain on the sale of your primary residence, you could be eligible to exclude up to $250,000 ($500,000 if married filing jointly) of it from your taxable income.
2. Home mortgage interest deduction:
You might be able to deduct all the interest you’ve paid on a mortgage secured by a qualified primary residence or second home. Keep in mind that there are special situations where additional items could count as interest too, including late payment charges and prepayment penalties related to the mortgage. Main factors that impact the specific deduction amount you’ll be eligible to take include the date your mortgage was originated, your filing status, the number of mortgages you have, your loan program(s), and how you’ve used any mortgage proceeds.
3. Mortgage interest credit:
If you’re among first-time homebuyers that qualify for a Mortgage Tax Credit Certificate (MTCC), this nonrefundable credit could reduce your federal income tax liability by up to $2,000. Your mortgage lender would issue it directly to you and the credit amount would be based on a percentage of the mortgage interest you paid.
4. Property tax deduction:
You could potentially deduct the personal property taxes you’ve paid on the homes you own. This is part of a combined deduction that also includes state and local income taxes and general sales taxes, with a limit of up to $10,000.
5. Energy efficient home improvement credit:
Since January 1, 2023, have you had a home energy audit or made energy-efficient home improvements? Improvements might look like installing electric or natural gas heat pumps, or ENERGY STAR certified windows, doors, and skylights. If your answer is yes and you meet certain qualification guidelines, you can claim a nonrefundable tax credit of up to $3,200.
6. Residential clean energy credit:
In comparison to the energy efficient home improvement credit that focuses on audits and improvements, the residential clean energy credit focuses on renewable energy (energy generated from naturally replenishing sources). If you've installed new renewable energy property in your home since January 1, 2022, like solar panels, water heaters, or wind turbines, you may qualify for this nonrefundable tax credit.
7. Medical expense deduction:
Home improvements you’ve made for medical purposes may qualify for the medical expense deduction. They’re considered capital expenses. Examples include structural modifications for physical disabilities such as widening the front doorway, adding support bars in bathrooms, or installing an outdoor wheelchair ramp. Medical expenses can only be claimed when they total over 7.5% of your adjusted gross income (AGI).
While homeownership involves various expenses, tax benefits can help homeowners save money. Understanding common deductions, credits, and exclusions empowers you to make informed decisions. If you need personalized tax advice, it’s recommended to consult with a tax professional. Be sure to do your research—the IRS offers helpful tips for choosing the right one.
