Top Homeowner Tax Incentives to Save You Money

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Aside from basking in the joy of dropping a troublesome landlord and dealing with rising rents, plus several other benefits, homeowners could be eligible to receive various brownie points from Uncle Sam in the form of tax credits and deductions. 

Here's a list of some common tax incentives that may come along with homeownership

Home Mortgage Interest Deduction

Homeowners — both single and married — are eligible to deduct interest paid on "qualified residence" loans (originating after Dec. 15, 2017) up to a limit of $750,000. For a married homeowner filing a separate return, the limit is $375,000. The Internal Revenue Service defines a qualified residence as a taxpayer's main home or second home.

It's important to note that the interest paid on all home loans, including home equity loans, that are used to buy, build or improve a main home or second home can't exceed the limits mentioned above; there aren't separate limits for each loan.

Property Taxes Deduction

Property taxes paid at the state and local level are eligible for a $10,000 deduction, or $5,000 for married taxpayers filing separately. This deduction applies to income and sales taxes as well. Foreign property taxes aren't eligible for a deduction.

Mortgage Interest Credit

This tax benefit is available to lower-income homeowners who meet certain qualifications. If you received a mortgage credit certificate from your local government, you may be eligible to claim a portion of the mortgage interest you pay as a credit.

Local governments only issue MCCs on new mortgages that are used to purchase a taxpayer's main home, and the government entity must be contacted about obtaining an MCC prior to a borrower taking out a mortgage.

Keep in mind that if you claim this credit, it counts against your home mortgage interest deduction, according to the IRS.

The rules that apply to home mortgage interest deductions and credits are full of limits and exceptions. If you plan to deduct your mortgage interest when you file taxes, proceed carefully, or get assistance from a trusted tax professional.

Mortgage Points Deduction

Points paid at closing to buy down your mortgage interest rate may be tax-deductible.

Homeowners are eligible to deduct mortgage points if they adhere to the following guidelines:

  1. Your primary residence secures the mortgage you're borrowing.
  2. Paying mortgage points is an established business practice in the area where the loan was made.
  3. The points paid weren't higher than the amount charged locally.
  4. You report income in the year you receive it and deduct expenses in the same year you pay them.
  5. The points paid weren't for items that are usually listed separately on a settlement sheet. These items include attorney fees, property taxes, title fees, etc.
  6. The funds you provided at the closing table or before closing were at least equal to the points charged. Borrowing from your lender or mortgage broker to pay points isn't allowed.
  7. You took out a mortgage for the purpose of buying or building your primary residence.
  8. The points were calculated as a percentage of the total mortgage amount.
  9. The amount you paid on points is clearly identified on your settlement statement.

Home Office Deduction

Taxpayers who use a dedicated space in their home for business activities might be able to deduct related expenses.

There are two options for calculating a home office deduction amount: simplified and regular. The simplified option involves multiplying a prescribed rate by the allowable square footage of the office, and the regular method involves determining actual home office expenses.

A home must meet basic requirements to qualify for the home office deduction. The first is that a part of the home must be used regularly and exclusively for business, and the second is that the home must be used as the principal place of your business.

Key Takeaways

  • The IRS incentivizes home ownership with a number of tax breaks especially for homeowners.
  • If you have a mortgage loan, chances are you'll be able to deduct at least some of the interest you paid, since the deduction applies to many types of home loans.
  • Property taxes and mortgage points can also be deducted if certain requirements are met.
  • If you use part of your home for business or as an at-home office, you can elect to deduct either a percentage of the actual space, or by calculating related expenses.

Frequently Asked Questions (FAQs)

Are there any tax breaks for having an energy-efficient home?

You may be eligible for deductions or credits at both the state and federal levels. Many states offer tax credits for new construction that incorporates green features, such as solar panels, or for green renovations of an existing property. At the federal level, you may be able to claim the residential energy efficient property credit up to an amount that matches the percent of the cost of the qualifying property.

Is there a tax break for first-time homeowners?

There used to be a tax credit available to first time homeowners but it was only a temporary measure after the 2008 housing crisis. However, in April 2021, President Biden introduced the First Time Homebuyer Act of 2021, which would offer a similar credit if passed.

Can I deduct the cost of utilities?

No. Utilities you pay for gas, electric, trash, water, and other services, are not eligible for any deductions related to homeownership. However, many government welfare programs do consider the cost of utilities in their assistance calculations.