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).
