Owning a home can offer some unique financial benefits, including appreciation and a potentially lower monthly cost compared to renting. But you might be wondering: Does buying a house help with taxes? The short answer is yes, there are numerous tax benefits associated with homeownership. The tax breaks you’re able to take advantage of can depend on how you file.
A financial advisor can help you create a financial plan for your home buying and tax planning goals.
How Does Buying a House Help With Taxes?
The Internal Revenue Service (IRS) extends several tax benefits to homeowners that can reduce what they owe, or potentially result in a larger refund. These tax breaks take the form of deductions.
So what good are tax deductions? A tax deduction reduces your taxable income for the year. Deductions can save you money at tax time if they allow you to move into a lower tax bracket. Your tax bracket determines which tax rate you pay.
There are two ways to claim deductions on taxes. You can either take the standard deduction or you can itemize.
Standard Deduction vs. Itemized Deductions for Homeowners
The standard deduction is a flat dollar amount you can deduct from your taxable income for the year. The amount you can deduct is based on your filing status. Here are the standard deduction amounts for the 2022 and 2023 tax years:
- Single filers and married couples filing separately: $12,950 for 2022; $13,850 for 2023
- Married couples filing jointly: $25,900 for 2022; $27,700 for 2023
- Heads of household: $19,400 for 2022; $20,800 for 2023
Itemizing, on the other hand, means listing out each deduction individually. Depending on how many deductions you’re claiming as a homeowner, the itemized deduction could be higher than the standard deduction.
Here’s why the distinction matters. You’ll need to itemize to claim certain home ownership deductions on your taxes.
Estimating your potential tax savings by itemizing vs. claiming the standard deduction can help you decide which one makes more sense.
Tax Deductions for Homeowners
If you plan to itemize, there are several tax deductions you might be able to claim for owning a home. The extent of the tax benefit you’ll be able to claim will depend on the deduction. Here are six tax deductions for homeowners:
Mortgage interest. The IRS allows you to deduct some or all of the mortgage interest you paid for the year. Your lender should provide you with a Form 1098 detailing how much interest you paid.
If you bought your home on or after December 16, 2017, you can deduct the interest on up to $750,000 in mortgage debt if you file single, head of household or jointly with your spouse. The cap is set at $375,000 for married couples who file separately.
If you purchased your home before December 16, 2017, the old limits of $1 million and $500,000 apply.
Mortgage points. Points allow you to buy down your mortgage interest rate by paying a fee upfront. One point is usually equal to 1% of the loan amount and your lender will include points paid on your Form 1098.
The IRS allows you to deduct the full value of points in the year you pay them. There are a few rules to note about deducting points:
- The mortgage must be used to buy or build your primary residence
- Points must be a percentage of your mortgage amount
- Points must not be used for items that are typically stand-alone fees
- The use of points must be a normal business practice in your area and the number of points paid must align with what’s typical for your area
- Points must be itemized on your loan documents
- You cannot have borrowed money from the lender to pay points
- You must use cash accounting on your taxes
If you’re not able to write off points in the year that you paid them, you might still be able to deduct them over the loan term.
Property tax. This deduction allows you to write off amounts you pay to local tax authorities for property taxes.
If your property taxes are escrowed into your monthly mortgage payments, the amount you paid should be listed on your Form 1098. If you don’t escrow taxes, you should be able to get a copy of your tax bill from your local property tax agency.
Deductions for state and local taxes, including property taxes, are capped at $10,000.
Private mortgage insurance. If you buy a home with less than 20% down your loan may require you to pay private mortgage insurance (PMI). This form of insurance protects the lender on the off chance that you default on the loan.
Eligibility for the deduction is based on your adjusted gross income. The deduction begins phasing out at $100,000 for single filers, heads of household and married couples filing jointly. The phaseout limit begins at $50,000 for married couples filing separately.
One thing to note about the PMI deduction is that it’s not guaranteed every year. While taxpayers were able to claim it in 2021, it has not been extended for future tax years as of November 2022.
Home equity loan interest. Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against your home equity. You can receive a lump sum or access to a revolving credit line that you can use for virtually any purpose.
The IRS allows you to deduct home equity loan or HELOC interest, with conditions. In order to claim this deduction, the funds must be used to build, buy or substantially improve the property that secures the loan.
That means if you’re taking out a home equity loan for debt consolidation, the interest isn’t deductible. But you could write it off if you’re using the money to fund a kitchen reno or build an addition on your property.
Home office deduction. If you work from home, you might be able to claim a home office deduction as long as you have a dedicated workspace.
The IRS allows you to claim a regular or simplified deduction. The regular deduction method requires you to account for individual expenses for your home office. The simplified method, on the other hand, allows you to deduct a flat dollar amount based on square footage.
You can report the home office deduction on Form 8829 when you file your tax return.
Are There Any Tax Credits for Homeowners?
Tax credits reduce your tax liability on a dollar-for-dollar basis. Here are two tax credits you might be able to claim as a homeowner in order to shrink your tax bill:
Mortgage credit certificate. Mortgage credit certificates (MCCs) are designed to help lower-income families afford to buy a home. Eligible homeowners can claim a tax credit toward mortgage interest paid, with an annual cap of $2,000.
Renewable energy credits. Making energy-efficient improvements to your home could help you to qualify for various renewable energy tax credits. For example, you may be able to claim the following credits for fuel cells, small wind turbines, geothermal heat pumps and solar energy systems.
The amount of credit you’re able to claim may depend on when you made energy-efficient upgrades to the home.
Does buying a house help with taxes? Yes, and in more ways than one, if you’re able to claim deductions and credits for home-related expenses. Again, however, you’ll have to itemize to claim certain home-related tax deductions so it’s important to consider how much of a benefit you’ll be able to get, versus taking the standard deduction.
Tax Planning Tips
- Consider talking to your financial advisor about the tax benefits that go along with home ownership and how to make the most of them. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Certain expenses associated with homeownership are not deductible. Things you can’t write off on your taxes include utility payments, homeowners’ insurance premiums, your down payment and depreciation. You can, however, deduct depreciation and other expenses on a rental property you own to help offset your rental income.
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