Owning a home can be a bit of a double-edged sword. Sure, it comes with a great sense of security and achievement. After all, you don’t have to pay rent or worry about getting in touch with a landlord before making updates and cosmetic changes. However, it also comes with one big drawback due to the financial aspects involved.

In short, being a fiscally responsible homeowner is a long-term commitment that starts with paying your closing costs and padding your escrow for necessary expenses incurred along with your monthly mortgage. Additionally, you’ll want a budget for maintenance (since there’s always something to maintain, fix, or update in a home).

Most homeowners absorbing these costs are often looking to take advantage of tax breaks they’re entitled to and put a little bit of money back in their wallets. Here, we break down some of the biggest deductions, as well as some of the lesser-known tax breaks you’ll want to look into:

4 Key Tax Deductions for Homeowners

The following four tax deductions are the most popular for homeowners:

Mortgage Interest

For almost everyone, the biggest tax break from owning a home comes when it’s time to deduct mortgage interest. But first, there’s one caveat to note: The Tax Cuts and Jobs Act of 2017 (TCJA) made some changes and limited tax deductions available to homeowners. It did so by increasing the standard deductions and placing new limitations on itemized deductions.

How did that affect mortgage interest? Now, homeowners who itemize their tax returns can only deduct mortgage interest on the first $750,000 (or $375,000 if a married couple is filing separately). It was a step down from the pre-TCJA maximum of $1 million (or $500,000 if filing separately).

To get the mortgage interest deduction, you must receive Form 1098 listing the mortgage interest paid during the previous year. You fill in that amount on line 8a or 8b of Form 1040 (Schedule A). If you recently purchased the home, Form 1098 needs to include any interest paid from the date you closed on the home until the end of that month. You’ll find the amount on the settlement sheet from closing, and it can still be deducted even if the lender didn’t include it on the form.

Mortgage Points

The IRS uses the term ‘points’ to describe charges paid to obtain a mortgage. Not all homeowners pay points, and so not all homeowners can claim them on a tax return.

Points are defined, rather simply, as prepaid interest. They can be deducted on your taxes over the life of the loan or in the year they were paid — but even that has strings attached. In order to deduct the points in the year that you paid them, you’ll need to meet a list of requirements (such as using the loan to buy or build your main home).

Most people don’t wait to deduct points for a standard mortgage, but you’ll need to cross your t’s and dot your i’s to make sure you qualify. On the other hand, if you’re buying a second home or refinancing, you’ll have to deduct the points gradually under most circumstances.

State and Local Tax (SALT deductions)

Many homeowners are used to paying state and local property taxes, and in some places, those numbers can be on the high end.

The good news is that many people can deduct the state and local property taxes they pay on their tax return. The bad news is the TCJA put a cap on the SALT deduction, which has to be itemized on line 5b of Form 1040. The cap is a $10,000 limit (or $5,000 if you’re filing a separate return from a spouse) on the combined amount of property taxes.

Mortgage Insurance Premiums

Homeowners who pay private mortgage insurance (PMI) can deduct their premiums. PMI is almost always charged if you put less than 20% down when you buy a home.

There’s one way you won’t be able to claim a deduction for PMI on your taxes. It phases out for homeowners with an adjusted gross income (AGI) higher than $100,000 and is erased completely if your AGI is higher than $109,000. (The amounts are $50,000 and $54,000 if you’re married but file taxes separately from your spouse).

Your PMI paid will be listed on Box 5 of Form 1098. You’ll report it on line 8d of Form 1040.

Lesser-Known Tax Breaks for Homeowners

Because you get hit with all kinds of taxes as a homeowner, it’s important to remember there are lesser-known tax deductions out there you might want to take advantage of.  These are far from big-ticket items, but they’re worth looking into for the benefits they provide:

Home Office

If you’re self-employed, you’re able to deduct expenses for the business use of your home. With that being said, the maximum deduction is $1,500 and certain rules apply.

Think you qualify? The home office deduction only covers true small business owners and entrepreneurs. It doesn’t cover employees working remotely by choice, or employees working from home during the coronavirus pandemic (or for other reasons). The good news is that you can claim the deduction whether you’re a homeowner or a renter, and it even applies to freestanding structures like a garage, so long as the space gets regular use for work purposes.

Rental Property Tax Deductions

Being a landlord has some perks, including the ability to deduct expenses associated with running your rental propery. There’s a bounty here to consider, from loan interest and property taxes to insurance premiums and general repairs. There’s a lot that can be overlooked, so it’s probably best to work with a financial advisor or tax specialist who can help break down what you can take advantage of.

Energy Credits and Medically Necessary Improvements

The installation of solar panels, a solar-powered water heater, or a geothermal heat pump might bolster your bottom line when it comes to filing your taxes. They all qualify for residental renewable energy tax credits, according to the U.S. Department of Energy. You can claim the credit for equipment in both your primary residence or a second home.

Additionally, while renovation of your home is not usually considered for tax deductions, improvements count if they are deemed medically necessary. That can be anything from installing a wheelchair ramp to modifying bathrooms.

Tax Breaks Worth the Trouble If You Qualify

There are a couple of tax breaks available to homeowners that are utilized less often, but are no less important. They include things like:

A Mortgage Credit Tax Certificate

The MCC, as it’s more commonly known, is geared toward low- and moderate-income and first-time homebuyers. It helps to offset a portion of the amount owed in mortgage interest. The MCC is not a tax deduction, per se, but provides a tax credit to increase housing affordability. It remains in place for the life of the mortgage loan as long as the home remains a principal residence.

The Capital Gains Exclusion

Normally, you have to pay a capital gains tax when you sell what the IRS considers a capital asset. However, this doesn’t include the sale of your home. Single tax filers don’t have to pay tax on up to $250,000 on the gain from the sale of a home, while those filing a joint return have a $500,000 exemption.

The Bottom Line

Before you file your taxes, check out changes and updates to existing tax laws. Some of them come and go by filing year, and you don’t want your tax returns triggering an audit to verify that tax laws are being followed.

If you’re having trouble determining what you qualify for, a tax professional can help you to better understand how these tax breaks can benefit homeowners. You won’t qualify for all of them, but you also don’t want to miss out on deductions that fall in your favor.

References

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