What are the tax benefits to owning your home?
Whether you already own your home, or you’re looking to buy or sell, there are tax benefits that may await you as a homeowner. Owning a home comes with tax deductions that can put more money back in your wallet—but many of these deductions come with limits, qualifications and requirements that should be reviewed.
Your tax benefits can also vary depending on what type of property you own, and where you are looking for these potential tax breaks. Let’s take a look at a few of the most common deductions that can benefit homeowners.
Mortgage Interest Deduction
The Mortgage Interest Deduction is a type of tax deduction that applies to the mortgage interest paid on your mortgage debt. This allows you to reduce your taxable income by the amount you’ve paid in mortgage interest throughout the year, up to a certain limit. Depending on when the loan originated, that limit will be either $750,000 or $1 million.
So, what qualifies as mortgage interest? Generally, it means any interest you pay on a loan secured by your primary residence or second home, as long as the property fits one of these categories:
- Mobile home
- House trailer
- House boat
There are some other payment charges and categories that can be deducted in connection with your mortgage loan, so it’s important to review Publication 936 from the IRS and speak with an advisor to fully understand all of your tax implications.
You can also find mortgage interest tax deduction calculators online from many reputable financial institutions, to help you understand exactly how much money you can expect to save in taxes. Your specific amount can depend on your loan amount and term, the interest rate, federal and state tax rates, property taxes and other factors.
When you input your mortgage loan information into the calculator—including the interest rate, down payment amount and term—it can determine your estimated tax savings over time. These calculators are a great way to get an idea of how much money you can expect, but be aware these calculators cannot take into account every personal financial detail. These figures only represent an estimation of your savings amount.
Property Tax Deductions
Homeowners are generally allowed to deduct state and local taxes paid on your property from your federal income taxes. You can reduce your taxable income by up to $10,000 ($5,000 if married but filing separately) in deductible property taxes, state and local income taxes, and sales taxes that you pay. However, this does not include taxes incurred on home renovations, or taxes from home services like yard maintenance or garbage collection.
Home Equity Loan Deductions
You cannot deduct taxes from home renovations on your property tax—but when you borrow on your home’s equity, you can deduct that interest paid—as long as the money is used to improve your home. See how much interest you’d pay using our Home Equity calculator.
Before 2018, homeowners could deduct the interest on their home equity loan no matter what the money went towards. That rule changed to cover only home equity proceeds which are used to buy, build or substantially improve the home, according to the IRS.
Home Office Expense Deduction
This type of tax deduction is not available for all employees that simply work from home. The home office expense deduction applies only to small business owners and self-employed people, who use their home as their primary place of business. The types of home expenses you can claim with the home office deduction commonly include:
- Real estate taxes
- Home mortgage interest
- Mortgage insurance premiums
- Security system
There are rules and exemptions to the home office expense deduction, so make sure you consult a tax expert before claiming these deductions.