The 8 Best Tax Breaks for Homeowners

Written by Posted On Thursday, 05 December 2019 06:00

Whether you're a first-time buyer or still searching for that perfect property, you've probably already done some homework on tax benefits and homeownership. If so, you're likely curious about the most common tax deductions for homeowners and which are the most lucrative. 

The truth is, a lot has changed in the world of homeownership and tax savings as modifications were made to real-estate-related deductions and tax breaks during the last filing season.

If you're looking to dig deep on what you can and can't use as a real estate deduction on your taxes, this article will summarize not only the most common deductions but also look at the best tax breaks for homeowners - some you may not even be aware of.

The Impact of the TCJA

In order to understand some of the deductions you can take on your home, it's important to understand the current tax laws that affect those deductions. The Tax Cuts and Jobs Act of 2017 (commonly known as the TCJA) was signed into law in late 2017. According to the Tax Policy Center, it marked the largest change in tax law in more than two decades and adjusted many individual tax provisions.

In the aftermath of the bill's signing, homeowners expressed disappointment and frustration over the diminishment of tax benefits that once subsidized homeownership. That was due to a substantial increase in the standard deduction, meaning millions of homeowners would likely no longer benefit from the same tax deductions previously taken and allowed by law.

But, did the TCJA eliminate tax breaks for homeowners across the board? It certainly did not. What it did do was nearly double the standard deduction and eliminated or restricted many itemized deductions through 2025.

The Most Common Tax Breaks for Homeowners

Despite a notable increase in the standard deduction under the TCJA, many Americans still continue to benefit from homeownership and itemized deductions. In fact, mortgage interest, state and local property taxes, and things like points paid at closing were and will remain viable deductions for homeowners.

  • The Mortgage Interest Deduction.  For most people, the biggest tax break from owning a home still comes from deducting mortgage interest. Why? Home mortgages are initially structured so that a large portion of each monthly payment goes toward paying interest on the loan and only a fraction goes toward the principal.  The good news is that homeowners can deduct those interest payments — up to $750,000. Using form 1098 filed with the Internal Revenue Service (IRS), homeowners detail the amount of interest and related expenses paid on their mortgage during the tax year.  (Consequently, homeowners may no longer deduct interest paid on home equity loans. This was previously allowed on loans up to $100,000 before the TCJA).
  • Points Paid At Closing. When a lender requires points paid at closing, what they're actually asking for is typically prepaid interest in exchange for a better rate (discount points) or a loan origination fee. Using form 1040, Schedule A, through the IRS, these points paid are deductible but often overlooked. Points are allowed to be deducted over the life of the loan or in the year that they were paid, depending on whether the mortgage holder meets certain requirements.
  • The SALT Deduction. If you've ever heard a reference to 'SALT' when dealing with tax deductions, it has nothing to do with the kind of salt you'd find in the kitchen cabinet at home. Instead, it refers to State and Local Taxes paid, which allowed homeowners to deduct their income and property taxes. Now, taxpayers are limited to a $10,000 itemized deduction for combined state and local taxes (or $5,000 for married taxpayers filing a separate return). The deduction applies to state and local income taxes and property taxes, and the Tax Foundation points to it as mostly benefiting taxpayers in high-tax states.
  • The Mortgage Insurance Deduction. Another potential tax benefit for homeowners is primary mortgage insurance, more commonly known as PMI. This is an amount required to be paid in order to protect the lender when a buyer can't put 20% down on a home. We say 'potential' because the deduction was phased out, but Congress has moved in the past to extend it. Lawmakers also continue to raise the issue of reinstating this and other potential tax breaks.

Here Are Four More Things You Can Write Off On Your Taxes

We get it. Knowing how and when to claim a tax benefit as a homeowner isn’t always easy, especially when you move beyond more common deductions. But if you currently own a home or you're considering a purchase, it’s important to know how your tax return might be impacted. The same can be said if you're about to sell your home or have made changes to your mortgage.

  • Home Office Deductions. According to USA Today, homeowners spend about $425 billion a year on everything from new kitchens to new roofs. Yet the best home renovations you can make for tax purposes involve upgrades to your home office. The write-offs apply to business owners who work from a dedicated space or a separate free-standing structure on the property, such as a garage or studio. To meet deduction requirements, it does not have to be your principal place of business or the only place where you meet clients. But the deduction is only based on the percentage of your home devoted to business use, the IRS says.
  • Capital Improvements. What's the difference between repairs and improvements on your home? To the IRS, there's a big discrepancy. You can't deduct general repairs such as clearing a clogged gutter or fixing a leaky pipe. But TurboTax says big renovations are considered capital improvements and can help reduce your taxes in the year you sell your home. Big-ticket items like a full kitchen renovation or new home addition can help the most when it comes to reducing your capital gains tax, but there's a high threshold to save when you sell. The first $250,000 in profit is tax-free for single filers, and it's double that for married couples who file joint returns. (Separately, homeowners may also qualify for a medical expense deduction if they've installed special equipment or made modifications to the home for medical reasons). 
  • Home Energy Upgrades. Did you know you can get a tax break for making certain energy upgrades to your home? While a number of tax credits for energy efficiency have expired, Energy Star is still highlighting credits available for residential renewable energy products through December 31, 2021. The credits apply to things like fuel cells, geothermal heat pumps, solar energy systems, small wind turbines, and more. Previously, the IRS also allowed deductions for qualified energy efficiency improvements, including insulation, doors, windows, roofing materials, and certain central air and home heating systems. It's possible that tax credits to offset some of the costs of these items will be revisited and reinstated by lawmakers at a later date.
  • Rental Expenses. Owners of investment properties must report all rental income on their federal taxes, but can still take advantage of deductible expenses. Things that can be claimed on a tax return for the property include mortgage interest, property taxes, operating expenses, repairs, depreciation, and more. The IRS even lets you deduct the costs of certain materials, supplies, and maintenance done to keep the property in good condition. Landlords can also deduct certain professional fees tied to a rental property, including the use of computer software or a CPA to prepare a tax return.

All told, there are many tax benefits to make owning a home beneficial and cost-effective. But the tax benefits put in place by the federal government also contain various conditions, restrictions, deadlines, and special rules. It's best to consult with your accountant or financial advisor to take advantage of the tax benefits and best tax breaks for homeowners. The challenge, in turn, is for tax professionals to help clients make the best financial decisions possible and make sure you're not missing out on all the deductions you should be taking advantage of.


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Bryan Dornan

Bryan Dornan has worked in the mortgage and finance industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States.

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