You don’t buy a house for the tax deductions. It’s just a nice side benefit. And usually very much appreciated, considering all the extra expenses associated with homeownership.
Here are eight tax breaks for homeowners that you’ll want to know about.
Dig deeper: Are closing costs tax deductible?
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The best-known tax break is most likely the mortgage interest deduction. It may also be the least understood. There are two keys:
“At the roughly 3% interest rates that had been standard for over a decade, few taxpayers had enough mortgage interest to be significantly higher than the standard deduction,” Crystal Stranger, senior tax director and CEO of Optic Tax in Boulder, Colo., said by email. “Now it is becoming much more likely to have an impact on tax returns with interest making up a larger portion of every mortgage payment, especially in the early years after purchasing a home.”
You’ll still want to consider whether taking the income tax deduction for mortgage interest — along with other deductions — exceeds the standard deduction. To deduct any specific expenses related to your home, you’ll have to opt for itemized deductions.
“If they have a medical event and were in the hospital for three or four months. Or, they’ve given a significant amount of donations — all of those things fall into those itemized categories. Mortgage interest is a component of it,” John G. Adams, a CPA in Jupiter, Fla., told Yahoo Finance over the phone.
Learn more: How the mortgage interest tax deduction works and when it makes sense
Accessing the equity in a house using a second mortgage unlocks the value you usually get only if you sell the property. Home equity loans and lines of credit can be invaluable tools to convert a portion of an illiquid asset (your home) into cash.
And it could provide another tax break.
Tax deductibility for HELs and HELOCs requires the proceeds to be used to buy or improve your home, though there are other restrictions too. One important consideration: Interest deductions are allowed on up to $750,000 of home loan debt, including first and second mortgages. If you are married and file your taxes separately, that drops to $375,000.
Dig deeper:
Discount points reduce your mortgage interest rate — and can be tax deductible.
Adams said that by paying a bit of interest upfront, you pay less interest over the remaining years of your mortgage. Roughly, for each 1% discount point, your mortgage rate is lowered by a quarter point. For example, on a $400,000 mortgage, you might pay $4,000 to lower your rate from 7% to 6.75%. Points can be purchased in fractions, as well.
“Just keep in mind that points are not financially smart unless you plan to live in your house at least five years before selling it, and most homeowners relocate before that,” Stranger said.
More details: When are mortgage points tax deductible?
Property taxes — in jurisdictions where they are collected — often fund many of the services and infrastructure where you live. And they can be an income tax deduction, along with other state and local taxes.
As with all of these other tax breaks, you’ll have to itemize your tax return and comply with appropriate limits. Tax software or a tax professional can ensure you get the numbers right because the rules often change yearly.
Read more: Property tax deductions — How much can you write off?
Now, we’re trimming the tax deductions down to a thin slice. Homeowners’ association fees are about as close as you can get to a nuisance fee in the owning-a-home scenario. They are also not generally tax deductible.
There are exceptions, but don’t hold your breath. You may be able to write off some or all of your HOA fees if you have an investment property, a house you use as an occasional rental, or a home office.
Dig deeper: Are HOA fees tax deductible? Sometimes — here’s when.
Many people are keeping their homes longer, so renovations and upgrades are popular. If you make home improvements that add to the property’s value, there’s a good chance those expenditures can be tax deductible.
The tax write-off will not be allowed for minor cosmetic touches, maintenance, or repairs but only for meaningful updates that increase your home’s market price.
Learn more: Which home improvements are tax deductible?
Working from home can have its benefits, he wrote while wearing a worn-out tee, joggers, and sneakers. But a tax break? Yeah, sometimes.
“If you use your house for business, it opens the door to significantly more deductions being available, including a portion of repairs, utilities, etc.,” said Stranger.
You can calculate the square footage of your workspace or, for the careful recordkeepers, itemize your actual work-related expenses.
The catch: To get the tax write-off, you’ll generally need to be self-employed or a contracted freelancer rather than a remote employee. And you’ll need a dedicated workspace.
Read more: Who can claim a home office tax deduction, and how much can you save?
The profit on the sale of a house is called a capital gain. You can avoid paying taxes on some or all of that sum under two conditions:
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The house has been your primary residence.
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You’ve lived in the home for at least two of the past five years.
Currently, the IRS allows a homeowner’s exclusion for the first $250,000 profit on the sale of a primary residence. That increases to $500,000 for a married couple. For example:
A married couple who file their taxes jointly sells their home for $750,000. Assuming they have a $100,000 mortgage balance on the house, and with the capital gains exclusion, they will pay capital gains taxes on $150,000.
$750,000 sales price – $100,000 mortgage balance – $500,000 exclusion = $150,000 capital gain
The amount you pay in taxes will be based on your annual income.
“Most homeowners I’ve seen who resell their house within two years have a small loss or break-even on the sale,” Stranger said. “Capital gains taxes rarely are an issue for homeowners selling their primary residence.”
Dig deeper: Capital gains tax on real estate — How much you’ll pay when you sell a home
Remember, with all the tax advantages duly considered, you’re buying a house for lifestyle reasons: Your family is growing, you’re moving closer to your job or family, or you simply want a place of your own.
You’re not buying a house for the tax benefits. Adams said that would be a “tail wagging the dog” sort of decision.
“You should always be thinking strategically — first about your family or your business life, and then taxes should be a part of it, but it really shouldn’t be the deciding factor of why you do stuff.”
As noted above, the most likely deductions include the interest you pay on your mortgage loan and, in some instances, the interest on HELOCs and HELs. Property, state, and local real estate taxes might also be written off. Pre-paid interest, called discount points, can be a deduction. And, sometimes, home office expenses and significant improvements to a house can provide a tax break.
If you have a home office, you may be able to take a deduction on a portion of work-related expenses. Or you can take a write-off based on an IRS deduction rate multiplied by the square footage of your dedicated workspace. You can also deduct losses from disasters and theft.
New homeowners can write off mortgage interest, discount points, property taxes, major home upgrades, and home office expenses.
If you have a home office and are not a full-time remote employee, you might be eligible to deduct a portion of the amount you paid for utilities based on the square footage of your workspace up to a maximum limit.
This article was edited by Laura Grace Tarpley.
