8 Tax Deductions for Homeowners
As a homeowner, you already have plenty of expenses in mortgage payments and home maintenance but there are also tax benefits to owning a home. You may be wondering, what are tax deductions for homeowners? Learn how to recover some expenses with this FreshBooks guide to tax credits for homeowners. We’ll cover different types of homeowner tax deductions and how to claim them on your returns.
- Homeowners are eligible for a variety of tax deductions related to mortgage interest, necessary home improvements, and other home expenses.
- You can choose to file your return with the standard deduction or the itemized tax deduction depending upon which offers you the greater amount.
- Some tax breaks for homeowners include home office expenses, mortgage insurance, and capital gains.
- There are some home expenses, like repairs and down payments, which are not tax-deductible.
Table of Contents
- Standard vs. Itemized Homeowner Tax Deductions
- 8 Homeowner Tax Deductions
- What Home Expenses Are Not Tax-Deductible?
- Use FreshBooks To Simplify Your Tax Preparation
- Frequently Asked Questions
Standard vs. Itemized Homeowner Tax Deductions
The first step when planning your homeowner tax deductions is to decide whether it makes more sense to file for the standard deduction or to file your deductions as an itemized list. Anyone can use the standard deduction, regardless of whether they’re a homeowner. The standard deduction amounts for your 2023 tax return are as follows:
- Single filers or married couples filing separately: $13,850
- Heads of households: $20,800
- Married couples filing together: $27,700
The itemized tax deduction list for homeowners is a summary of all the deductions a homeowner can apply to their taxes. If your total exceeds the amount you could claim with the standard deduction, it’s better to file claiming itemized tax deduction. If the total is less, you can forego using the itemized deduction and still claim the standard deduction.
8 Homeowner Tax Deductions
The following are IRS tax deductions for homeowners that you can include on your tax return:
1. Mortgage Interest
One of the primary tax deductions available to homeowners is the mortgage interest tax credit. This deduction applies only to the mortgage interest paid in your monthly payments—not to the down payment on your home or to the principal payment.
There are limits to the deductible mortgage interest amount. For example, a single person or a married couple filing jointly can claim mortgage interest deductions on a total loan balance up to $750,000 in. The loan limit for married couples who file separately is $375,000 each. In order to claim the mortgage interest deduction, file it as an itemized deduction on your taxes.
2. Discount Points
Discount points are a means of lowering your real estate mortgage interest rate. Each discount point is equivalent to 1% of your mortgage amount, and different lenders may have different limits on how many points you can purchase. Because these points impact your interest rate, you can claim the cost of them as an itemized deduction on your income taxes. Discount points are different from loan origination points, which can’t be claimed as deductions.
3. Property Taxes
Each year, you pay state or local government property taxes on your home and any other properties you own. You’re eligible to claim a property tax deduction for a certain amount of these taxes. If you’re single or married filing separately, you can claim up to $5,000 or up to $10,000 as a married couple filing jointly. You can add this to your itemized deductions.
4. Home Equity Loan Interest
Home equity loans are similar to mortgages in that you use the value of your home as collateral to borrow money. The deductible interest works similarly, too—you can’t deduct the value of the loan, but you can deduct the interest you’ve paid on it.
New regulations in 2017 added an additional limitation: You can only deduct interest paid on home equity loans if you used the loan to fund a home improvement project. If you’re a homeowner looking to make improvements on your home, this may be a good tax-deductible solution that you can easily claim as one of your itemized deductions. The same loan balance limits apply as when claiming interest for your first mortgage.
5. Necessary Home Improvements
Necessary home improvements encompass two main elements: improvements that are necessary for continued living in the home, such as medical assist devices, and improvements that increase the value of the home. Medically-required improvements are often deductible that year, whereas value-added improvements like a new driveway or kitchen appliances are deductible in the year the home is sold – if your capital gain is more than the current capital gain exclusion.
There are additional credits for homeowners that make their home energy efficient.
It’s important to keep accurate records and receipts of all improvements so that you can deduct them at the appropriate time. Basic home repairs, such as repairing windows and roofing, do not qualify for deductions.
6. Home Office Expenses
If you run a business and conduct some or all of your business operations from home, you may be able to deduct expenses for part of your home space. This applies only to running a business, not to remote work for employers. Also, the part of the home you use must be used exclusively for business.
The home office deduction is available for homeowners and renters. Some of the expenses you can deduct are mortgage interest, rent, utilities, internet, repairs and insurance.
The home office deduction amount is based on the percentage of your home that you use to conduct business or a flat $5 per square foot for up to 300 square feet.
7. Mortgage Insurance
Interest isn’t the only mortgage-related payment you can claim as a deduction—if you pay for private mortgage insurance (PMI), you may also be eligible to claim these payments. A mortgage lender may require homeowners to have PMI if their down payment is less than 20% of the home value., Like mortgage interest, you can claim PMI deductions on your itemized tax return.
8. Capital Gains
Capital gains tax deduction can be one of the most significant deductions for homeowners who sell their home. When you sell your primary home for a profit, capital gains is the difference between the purchase and the sale price—for example, buying a home for $200,000 and selling for $225,000 gives you capital gains of $25,000.
If your home was your principal residence for 2 of the last 5 years, you can keep up to $250,000 of tax-free capital gains as a single filer or a married couple filing separately, or $500,000 as a married couple filing together.
Ready to make your homeowner tax deductions even easier? The video below takes you through how FreshBooks can simplify your tax filing with beginner-friendly tax preparation software.
What Home Expenses Are Not Tax-Deductible?
While there are many deductions you can claim as a homeowner, it’s important to be aware of some of the non-deductible expenses. Some home expenses that you can’t claim include:
- Premiums on homeowner insurance and insurance against fire
- Your mortgage principal payments
- Depreciation of your primary home
- Domestic services for your home
- Down payments on properties
- Loan origination points on mortgages
- Any utility expenses like electricity, water, and gas
Use Freshbooks To Simplify Your Tax Preparation
There are many deductions available to help reduce tax payments for homeowners. If your homeowner tax breaks exceed the amount of the standard tax deduction, it may be in your best interest to use itemized tax deductions on your return so you can claim all the deductions available to you. FreshBooks accounting software makes it easy to track and categorize your homeowner expenses, so you can make the most of every available deduction. Try FreshBooks free today to discover tax support and benefits for homeowners and small business owners.
Learn more about other deductions that can save you money next tax season with FreshBooks guide to Small Business Tax Deductions.
FAQs About Tax Deductions for Homeowners
Still have questions about homeowner tax deductions? Browse our FAQs to learn about itemized deductions, energy-efficient upgrades, rental property deductions, and more.
Do homeowners have to itemize deductions?
It’s not mandatory to itemize your homeowner deductions, but it can be beneficial if your total deductions amount to more than the standard deduction. FreshBooks accounting software helps you keep track of tax-deductible expenses so you can easily calculate totals and decide whether the standard or itemized tax deduction is best.
Are there any tax deductions for energy-efficient home upgrades?
Yes, the IRS now offers residential energy credits up to $3,200 for qualifying energy-efficiency improvements. Keep track of all your home improvement costs with FreshBooks accounting software, then take advantage of the tax filing support to check that you’ve claimed every expense on your itemized tax return.
How do I report rental property deductions as a homeowner?
If you rent part of your home or other property, you may be eligible for rental property deductions which you can report on Schedule E of Form 1040 or 1040-SR to the IRS. FreshBooks accounting software helps you organize and file your real estate taxes, rental property income, and deductions to reduce your taxable income.
Are there any tax deductions for first-time homebuyers?
There aren’t currently any specific tax deductions for new homeowners. However, first-time homebuyers can take advantage of other homeowner tax deductions like deductions on mortgage interest, home equity loan interest, and property taxes.
Are there any special tax deductions for seniors who own a home?
Depending on where you live, senior homeowners may be eligible for special tax deductions. For example, New Jersey offers a $250 property tax deduction for seniors over 65 as well as for disabled people and their surviving spouses. Check your locality to see if you’re eligible for any special deductions in addition to average tax deductions for homeowners.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .