Homeowners & Tax Breaks: What's Out There?

Owning a home is not cheap, even after you have made the down payment and started a 

mortgage.  The average homeowner spends $15,405 on top of their mortgage every year, according to real-estate company Clever.

Some of these expenses come with a silver lining - they are considered tax credits or deductions for your home!  As a homeowner, you should learn as much as your can about the potential tax benefits that can help you get more back on your refund! 

Most homeowners with mortgages understand they can deduct payments toward their loan interest but many tax deductions and credits involved in owning a home are not as obvious. 

Let’s learn about the potential tax breaks for homeowners! 

Mortgage interest is the biggest tax break for homeowners.  Mortgage interest -- or the amount of interest you pay on your home loan yearly -- is the most common tax deduction for a homeowner. It's also often the most fruitful, particularly for new homeowners whose payments generally go more toward loan interest during the first years of a mortgage.

What about mortgage points? You can buy mortgage points, or sometimes called “discount points,” when buying a house to decrease the interest on your mortgage.  Each 1% of the mortgage amount that home buyers pay on top of their down payment reduces their interest rate by 0.25% (this is a generalization, the exact amount will depend on the lender and loan type).  The IRS considers mortgage points to be a prepaid interest, so not only can you save money on a 30-year mortgage by lowering the total interest, they also save you money on your taxes when you buy them. 

Mortgage-Interest tax credit can be BIG for new homeowners. Homeowners who have received a Mortgage Credit Certificate (MCC) from a state or local government can get a percentage of their mortgage interest payments back as a tax credit.  MCC’s are usually acquired through your mortgage lender.  Mortgage certificate credit rates can vary and are based on states, they can range between 10 to 50 percent.  This tax tip is most effective if you are a first-time homeowner, which is defined as not living in a home that you’ve owned for the past three years.  Be sure to ask your lender about MCC and if you qualify. 

You can only deduct a certain amount of your property taxes.  Property taxes can be deducted from your taxes but a much lower amount than before 2017.  The Tax Cuts and Jobs Act of 2017, you can only deduct up to $10,000 combined from your property taxes and state and local income taxes.  

What about my home office expenses?  Homeowners who use any part of their home, apartment or condo”exclusively and regularly” for their own business or a side job can claim home business expenses.  The home-office deduction is based on $5 per square foot used for business up to 300 feet.   Home office deductions are not available for remote employees or companies. 

What if I have an electric charging station? Electric vehicle charging stations can give you money back on your tax bill. If you install any alternative energy charging station in your home, you get a maximum credit of 30% of the cost or $1,000 (whichever is smaller).

Go green for energy-efficiency tax credits.  If you made energy-efficient improvements to your home in 2022, you likely can get some of that money back as tax credits.  This does get a little complicated though.  There are two types of tax credits for home energy improvements – the residential clean energy credit and the energy efficient home improvement credit. 

The residential clean energy credit can give you 30% back on any money you spent installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems or fuel cell property. The only limit is for fuel cell property -- $500 for each half a kilowatt of capacity.

The energy-efficient home improvement credit, also known as the nonbusiness energy property credit, is then split into two categories -- "residential energy property costs" and "qualified energy efficiency improvements." 

In the first case of energy property costs, you'll get a flat tax credit of $50 to $300 for installing Energy Star-certified items like heat pumps, water heaters or furnaces. In the second case of qualified improvements, you can get a 10% tax credit for the cost of improvements like adding insulation, fixing a roof or replacing windows.

The energy efficient home improvement credit has a $500 lifetime limit for all improvements made after 2005. Starting in 2023, the Inflation Reduction Act will replace the $500 lifetime limit with a $1,200 annual limit for the tax credit.

Interest from home equity loans can be deducted.  Any interest from a home equity loan or a second mortgage can be deducted from your taxes just like you would your regular mortgage interest.  This does have a limit of maximum loan totals of $1 million or $750,000 (for joint) if you purchased your home after December 15, 2017.  It’s also important to note that the 2017 tax law limits deductions for home equity loan interest to money that is used to “buy, build or substantially improve” homes.

Include all your home improvements in the cost basis when selling your home. Any income you earn from selling your home is taxable as capital gain.  Your gain is calculated by the difference between your sale price for the home and your “cost basis”.  Cost basis could include what you paid for the home, the price of improvements that you made as well as any property loss from depreciation or casualty.

If you put on a new roof, replace the furnace or refinished floors - be sure to include those costs to increase your adjusted basis and reduce the amount of capital gains on the sale.

Did you sell your primary residence?  You get a tax deduction.  When you sell a home, you need to pay taxes on the amount you earned on the sale as capital gains.  However, if you lived in the home for two of the previous five years before selling, you could be entitled to a very large tax exclusion - $500,000 for married joint filers, or $250,000 for single or separate filers.

Those who qualify receive this tax exclusion regardless of their age and regardless of how many times they've benefited from it before. Make sure that the residence requirements apply whether you own the home or not. If you rent a house for two years and then buy it, you're free to sell with the standard residence exclusion at any time.

Home improvements for medical needs can be deducted. Medical expenses can be a major tax deduction, but only if they go over 7.5% of your adjusted gross income.  Any home improvements like - adding safety bars, accessibility ramps, wider doorways, railings or lifts - related to medical conditions can be included in your tax deductions for medical expenses.  Make sure to keep all of your receipts and invoices and include the total cost of the improvements or additions that you make. 

Even with all of the tax breaks available for homeowners, there are some home-related expenses that cannot be deducted from your income.  

Your down payment for a mortgage
Any mortgage payments toward the principal loan
Utility costs like gas, electricity and water
Fire or homeowner’s insurance
House cleaning or lawn maintenance
Any depreciation of your home’s value

*** With these options to explore, please research and talk to a financial professional about your property tax and tax deduction options for your taxes before you file.

Article information from CNET.