Tax Time! What Are the Tax Benefits of Homeownership?

Owning a home is not just about having a place to call your own – it’s also a major financial investment that has the potential to yield significant savings when it comes to your taxes. There are numerous tax breaks out there for homeowners.

While there’s no substitute for customized financial and tax guidance, we will touch on some of the major advantages you can expect to see at tax time when you own a home.

Understanding the Benefits of Itemized Deductions

The vast majority of people take the “standard” deduction when they file their taxes instead of itemizing – but homeowners may want to rethink that tactic. Itemized deductions require you to meticulously list all your individual tax-deductible expenses, such as mortgage interest, property taxes and home office expenses, among other things, for the maximum benefit.

On the other hand, the standard deduction is a fixed amount set by the government – which is simpler to use but means potentially missing out on additional savings. For 2023, singles can only deduct $13,850 using the standard deduction, heads of households get to deduct $20,800 and married couples who file jointly get $27,700 – all of which may be significantly less than you get by itemizing. By keeping detailed records of your eligible expenses once you own a home, you can strategically lower your taxable income and increase your potential tax return.

What Sort of Tax Deductions Do Homeowners Get to Take?

We’ve briefly touched on a few, but here are some detailed explanations of the sort of things you can use when calculating your tax liabilities as a homeowner:

1. The Mortgage Interest

Arguably the most significant tax benefit for homeowners, the mortgage interest deduction allows you to deduct the interest you’ve paid on your mortgage loans over the previous year.

This deduction applies not only to your primary residences but also to any secondary homes you may have, which makes for additional savings if you happen to be lucky enough to own a vacation property. This deduction can result in substantial long-term savings for you over the life of your loan, especially in the early years when most of what you’re paying is actually interest.

2. Home Equity Loan Interest

Are you a homeowner with a home equity loan? Whether you took it out to fund your child’s college education or you decided to do some upgrades, that interest you’re paying on that loan is also deductible – just like the interest on your primary mortgage.

3. Mortgage Insurance Premiums

Did you put down less than 20% on your home when you bought it? Private mortgage insurance (PMI) was probably required. Fortunately, the premiums paid for PMI are also likely to be tax-deductible, which may come as some welcome relief and balance out those financial scales a little.

4. The Cost of Discount Points

Mortgage discount points are upfront fees that you can pay to a lender at the time of closing in exchange for a lower interest rate on a mortgage loan. Each point typically costs 1% of the total loan amount.

The decision to pay discount points is essentially a trade-off between paying more upfront versus paying more over the life of the loan – but, if you purchased them, you can deduct their cost. (Do not confuse these with origination points, which are a processing fee charged by the lender. These are not the same, and are generally not deductible.)

5. Property Taxes

While property taxes represent a significant annual expense, homeowners can find solace in the fact that these taxes are generally tax-deductible – and that’s true even if your mortgage is paid off. Deducting your property taxes can substantially reduce your taxable income, making homeownership more economically viable.

6. Necessary Home Improvement Costs

This is a great deduction to take if you are taking steps to remodel your home with the goal of “aging in place.” While exactly what is considered “necessary” when it comes to home improvements can be debatable, permanent improvements to your home that are designed to accommodate medical situations do generally qualify for this special deduction.

You may be able to deduct things like a bathroom remodel to add a walk-in tub designed to accommodate someone with limited mobility, the cost of adding ramps to the entrances of your home or widening doorways for better access for wheelchairs.

7. Residential Renewable Energy Tax Credits

Homeowners investing in renewable energy sources, such as solar panels, wind turbines or geothermal heat pumps, may qualify for the Residential Renewable Energy Tax Credit.

This credit allows you to claim a percentage of the cost of installing qualifying energy-efficient systems – all with the goal of contributing to environmental sustainability (and your own heating and cooling savings). It’s essential, however, to check the current tax laws and consult with a tax professional to ensure eligibility and maximize your benefits because the rules on these credits can be quite complex.

8. A Home Office Deduction

Are you among the many people who have shifted to remote work either full-time or part-time? Is your spouse operating a business out of the basement? Are you working a side gig or two from the spare bedroom? Many homeowners now use a portion of their homes as dedicated office spaces – and that can be deductible from your taxes.

The home office deduction allows qualifying homeowners to deduct a portion of their housing expenses, such as mortgage interest and utilities, associated with their home office. You may also be able to deduct a percentage of your ordinary home repairs and improvements as part of the home office deduction.

What’s the Bottom Line When It Comes to Tax Deductions for Homeowners?

From the invaluable mortgage interest deduction to the nuanced advantages of home office deductions, you have an array of strategies to lower your tax liabilities as a homeowner. If you aren’t confident in your ability to strategically apply these tax breaks, a tax professional can help you make that leap.