The Tax Benefits of Homeownership: Maximizing Your Savings

The financial implications of homeownership extend far beyond the accrual of equity. New homebuyers and established homeowners are typically eligible for a host of tax benefits that can translate to substantial annual savings.
A qualified tax professional can assess your personal financial situation in meticulous detail, but this guide will give you a good idea of what homeowner tax benefits you should inquire about. 

The Foundation of Homeownership Tax Benefits

The tax benefits of owning a home can come in the form of deductions, credits, and exemptions. Eligibility isn’t always a given and can be determined by several factors, from income and tax bracket to age and mortgage status.   
We’ve identified key deductions, credits, and exemptions below, but first, let’s run through how these three categories differ.

Tax Deductions

A deduction is a subtracted portion of your taxable income. Taking a deduction is effectively reducing the amount of your money that the government taxes, so the amount you owe in taxes naturally decreases as well.

Tax Credits

A tax credit is a reduction in the total amount of taxes you owe. To give a simple example, let’s say your tax bill is $5,000 but you’re eligible for a $1,000 tax credit. You would need to pay only $4,000 instead.
Broadly speaking, tax credits result in more savings than dollar equivalent tax deductions.

Tax Exemptions

An exemption can be similar to a deduction. If any portion of your income is tax exempt, it’s not included in your overall taxable income.
It’s important to note that the Internal Revenue Service (IRS) allows taxpayers to take a standard deduction or itemized deduction when filing taxes each year. The standard deduction is a predetermined amount that taxpayers can deduct from their adjusted gross income (AGI). This amount is dependent on filing status and varies from year to year. For example, see the table below for the standard deduction amounts in 2023 and 2024.

An itemized deduction, on the other hand, is a list of eligible deductions that the filer (or tax preparer) reports to the IRS. Usually, the itemized deduction isn’t worth taking unless the total of your eligible deductions exceeds the standard deduction. This is important to remember in the context of tax deductions for homeowners. If your mortgage and property tax deductions don’t exceed the standard deduction, it probably makes more sense to stick with the standard deduction when you file your taxes.
Another important takeaway here is that your filing status will dictate your potential savings from itemizing. Let’s say a single person and married couple have identical itemized deductions that exceed their respective standard deductions. While both the single person and married couple will realize some additional tax savings, the married couple’s bonus savings will be less because their standard deduction is already twice the amount of the single person’s. In practice, this means that itemizing deductions is often more worthwhile for single tax filers and for people in high income brackets.

Mortgage Interest Deduction

The IRS does allow homeowners to deduct interest paid to their mortgages, but there are some caveats:

• Your mortgage must be classified as secured debt. This typically means that your home functions as collateral for your bank or lender. So, if you default on your mortgage, your lender has an asset to repossess to resolve your debt.
• Your mortgage must be used to pay for your home. Another stipulation is that you must be using your mortgage to purchase, construct, or significantly improve your home. You could be disqualified from deducting your mortgage interest, then, if you’re borrowing against your home to pay for some other substantial expense.
• Your interest payments are deductible on mortgage debt of $750,000 or less (or $350,000 or less if single or married and filing separately). The IRS sets a cap on the mortgage interest you are allowed to deduct. These figures apply for mortgages taken out after December 15, 2017.

Bear in mind that there are other stipulations, rules, and guidelines that may or may not apply to your individual situation. Circumstances that could affect your mortgage interest deductions include:

• Whether the property is a primary or secondary residence
• Whether you rent out all or part of the home to tenants
• Pre-payments on interest beyond the current tax year
• A home sale or change in filing status during the tax year
• Ownership of more than two homes
• Whether you received mortgage assistance or government loans
• Divided use of your home, such as using a portion for a home office or small business

A tax professional can help you determine how much mortgage interest, if any, you can deduct to help you minimize your chances of an IRS audit because of improperly itemized deductions.
It may be especially worthwhile to look into mortgage interest deductions if you are a new homeowner. Mortgage interest payments typically decrease over time, so new homeowners may have a higher deductible amount in interest than established homeowners. This makes the mortgage interest deduction one of the key tax benefits of buying a home.

Property Tax Deductions

Property taxes you pay to your state or local governments are typically deductible. The IRS caps the amount of state and local taxes you can deduct at $10,000 (or $5,000 if single or married and filing separately). This cap applies to all deductible state and local taxes, not just property or real estate taxes.
Similarly to mortgage interest deductions, it’s probably only worth itemizing your property tax if your total deductions exceed the standard deduction that corresponds to your filing status.

Home Office Deduction

If you use your home as an office or for your small business, you likely qualify for a home office deduction on your federal taxes. A few things to consider before you include the home office deduction in your itemized deduction list:

• You cannot claim the deduction if you’re an employee for another company who works remotely. The deduction is meant for the self-employed and people who use their residence for their own business operations.
• Your home office or work space has to be used solely for work. 
• The amount you claim in deductions cannot be larger than the income you declare from your business.

Capital Gains Exclusion

There are some potential tax benefits to look into when you sell your home as well. The capital gains exclusion is one example. This policy allows married filers to avoid paying taxes on the first $500,000 of profit from a home sale (the figure is $250,000 for single homeowners or married couples filing separately).
There are also more specific requirements here, though. For example, the IRS requires you to have used the sold property as your primary residence for at least two of the five years leading up to the sale. 

Energy Efficiency Tax Credits

A notable benefit of owning a home as opposed to renting is that you have the freedom to make structural improvements that make you eligible for certain tax credits. The energy efficiency tax credit is a good example.
If you have made energy efficiency improvements to your home since January 1, 2023, you could qualify for a tax credit of up to $3,200. The IRS specifies credit amounts for specific kinds of improvements. For example, installing a heat pump or biomass stove with a qualifying efficiency rating (75% or greater) makes you eligible for a credit up to $2,000.
The IRS maintains a thorough list of qualifying improvements. These include replacement doors and windows, insulation, air sealing materials, and efficient home heating and cooling appliances.

Other Potential Tax Benefits for Homeowners

There are many other potentially deductible expenses that you may be able to use to reduce your tax bill. Some examples are:

• Private mortgage insurance (PMI) expenses
• Medically necessary home improvement costs
• Government-backed housing loan fees
• Mortgage discount points
• Moving expenses (for members of the armed forces)

There are also local tax exemptions that you can research. Some localities might cite tax exemptions for resident homeowners over the age of 65 or for homeowners who manage a disability. A qualified local tax professional or some quality tax software can help you ensure that you are receiving the deductions and credits that you are entitled to.
And remember that you can also pursue other ways to save money as a homeowner. A home warranty, for example, could reduce your appliance and system maintenance and repair costs. When used in concert with smart tax filing, your savings can grow substantially from year to year.
Call the Liberty Home Guard team at (833) 566-9564 to learn more. If you share some details about the nature of your home and the systems and appliances that make it so, we’ll help you craft the personalized plan that you won’t find anywhere else.