Homeowners

5 Ways Owning a Home Can Help You Save on Your Taxes

There are numerous benefits to owning a home.

You can build wealth for you and your family, lock in much of your monthly housing payment, put down roots within your community—and potentially even save money on your taxes.

Most of the tax benefits from owning a home are in the form of tax deductions. This means that to reap the full tax benefits of homeownership, you’ll have to itemize your deductions, rather than take the standard deduction.

If you’re a homeowner, your potential deductions could include one for the interest you pay on your mortgage. Homeowners generally receive a Form 1098 showing the interest they paid in the previous year that can be submitted with your tax returns.

There are other potential homeowner deductions as well. 

“Mortgage interest is tax deductible. Property taxes on the home are also deductible. A large portion of capital gains is excluded when you sell your home, provided that you meet all the requirements,” said Gary Massey, CPA, managing director at Massey and Company CPA. “And one of my favorites, business owners can deduct a percentage of a broad variety of expenses related to the home if they take a home office deduction.”

Taking those deductions, if you’re eligible to do so, may help to lower your tax bill. That could result in a refund check, depending on your circumstances. 

Should homeowners itemize their taxes or take the standard deduction?

Homeowners will need to decide whether it’s better to itemize their taxes to take advantage of potential homeowner and other deductions—or choose the standard deduction.

Standard deductions are the amount that taxpayers can generally just write off. Typically, taxpayers want to total their itemized deductions to see which amount is higher.

According to the IRS, the standard deduction amount has increased for 2024 to the following levels:

·         Single or Married Filing Separately—$14,600

·         Married Filing Jointly or Qualifying Surviving Spouse—$29,200

·         Head of Household—$21,900

The big tax savings: The mortgage interest deduction

The largest potential deduction for homeowners with a mortgage is for the interest they pay on their home loan.

Whenever you make a mortgage payment, part of it goes to the principal (the amount you originally borrowed) and part goes to the interest (a fee charged by the lender for borrowing the money).

You can deduct the interest you paid during the tax year in question.

If you paid more than $600 in mortgage interest, you will receive a Form 1098 from your mortgage company.

Under Internal Revenue Service (IRS) rules, you can deduct the interest you paid on up to $750,000 of your loan if your mortgage was originated after Dec. 15, 2017.

If your mortgage started on or before that date, the deduction limit is up to $1 million.

“Interest on home equity loans is deducible too, provided that you used the money to fix up your house,” Massey said.

What is Form 1098 and why is it important?

If you’re interested in taking advantage of the mortgage interest deduction, you’ll need a Form 1098. This tax document is also known as the Mortgage Interest Statement.

Your mortgage company is required to provide you with a Form 1098 if you paid more than $600 in interest in a calendar year.

Form 1098 provides information about the amount of interest you paid on your mortgage, the remaining principal balance on your loan, when your mortgage was originated, and more.

The amount of interest you paid will be listed under “Mortgage interest received from payer(s)/borrower(s)”. This is the key piece of information you’ll need from this form to include in your tax return.

The amount of interest you paid can significantly reduce the tax owed, especially in the early years of a mortgage when interest payments are highest.

Form 1098 will also show if you paid any “points” to lower your interest rate. When you first took out your home loan, your lender may have given you the chance to pay points on your loan to lower your rate. You may be able to deduct that amount.

What other deductions are available to homeowners?

There are four other main tax deductions that homeowners may be able to take advantage of:

SALT Tax Deduction: Depending on where they live, homeowners may be allowed to deduct their state and local taxes (called SALT taxes). These can include property taxes, which are based on the value of the home. The current cap for SALT deductions is $10,000.

Capital Gains Exclusion: When a homeowner sells their primary residence, they may be able to exclude up to $250,000 of the gain on the sale (the profit) from their taxes if they’re single, or up to $500,000 if they are married filing jointly. This can be a significant benefit if the home has appreciated in value over time.

Home Office Deduction: If you are self-employed and work from home, you may be able to deduct expenses related to your home office. “Homeowners with a home office can deduct a percentage of their mortgage interest, real estate taxes, homeowners insurance, utilities, internet, home telephone, cleaning, HOA fees and more,” Massey said. “Just keep good records and receipts!” Employees who receive a W-2 are not eligible for this deduction.

Energy Efficiency Upgrades: If you make energy-efficient home improvements, you may qualify for a tax credit of up to $3,200. This can include things like solar panels, wind turbines, or geothermal heat pumps.

These benefits can vary based on each person’s specific situation and the tax laws in their area. That’s why it's always a good idea to consult with a tax professional or financial advisor before filing their taxes.