Discover homeowner tax deductions that may save you money during tax season for simply owning a home.
Owning a home has its rewards and challenges — and that’s especially true at tax time.
Depending on your circumstances, the tax rules around homeownership can lessen your tax obligation when it comes time to file. But before diving into all the math, it’s worth considering which type of deduction makes the most financial sense for your situation.
What kind of deduction can I take?
When you file taxes as an individual taxpayer or a married couple, you have two choices that help determine whether you owe or are owed money from the federal government: You can take the standard deduction or you can itemize by adding up the expenses you’re allowed to deduct from your income.
The standard deduction will reduce your taxable income by:
- $12,550 if you’re filing as an individual
- $18,800 if you’re filing as a head of household
- or $25,100 if you’re married and filing a joint return
If the expenses you’re allowed to deduct add up to more than the standard deduction, it makes sense to itemize.
Generally, your mortgage will only come into play on your taxes if you itemize deductions, and the total amount of the deductions — including mortgage interest — amounts to more than the standard deduction.
Note: If you were previously itemizing your deductions and refinanced into a lower rate mortgage on the same amount, you will be paying less interest on the loan so you may find that the standard deduction is a better option this year.
Whether you’re filing taxes for the first time as a homeowner, filing after a recent refinance or just sold a home, read below to review some of the tax deductions for homeowners as the filing deadline approaches.
Before we do, the all-important disclaimer: Tax results can vary based on your specific set of facts and circumstances. Consult with a tax professional or certified public accountant to determine how these and other tax ramifications of rental property ownership apply to you.
Types of itemized deductions
Mortgage interest deduction
If you financed a home purchase in 2021 — or increased the size of your mortgage with a cash-out refinance — it could be worth your while to itemize to capture the mortgage interest deduction. The only way to tell is to add up all of your deductions to see if they amount to more than the standard deduction.
Those who do itemize deductions can deduct mortgage interest up to $750,000 by filing IRS form 1040 with a Schedule A to itemize deductions.
The Tax Foundation, a not-for-profit think tank, estimated in 2018 that only about 14% of U.S. homes would be worth enough to take advantage of the mortgage interest deduction. This is in part due to a significant increase in the standard deduction in 2018 as part of the Tax Cuts and Jobs Act, making the interest deduction less meaningful.
Deductions for a second home or vacation home
The IRS defines a qualified home as a main or second home that can be a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities. A main home is the place where you ordinarily live most of the time. The IRS has two definitions for second homes:
- A second home that is not rented out: If the home is not up for sale or rent to others at any time during the year, you can treat it as a qualified home and do not necessarily have to use it during the year.
- A second home that is rented out: If the home is rented out for part of the year, it must also be used as a home for a portion of that year. The home must be used for a minimum of 14 days or 10 percent of the number of days that the property is rented out, whichever is longer. If the property is not used long enough the IRS classifies it as rental property.
Property taxes
Property taxes — the annual tax you pay based on the value of your property is also tax deductible up to a point. You can generally deduct up to $10,000 in combined state and local income, sales and property taxes for all properties owned. (The amount is $5,000 for married people who file taxes separately.)
Home equity loan
A home equity line of credit (HELOC) gives homeowners a loan which they can then use for large expenses or to consolidate higher-interest rate debt on other loans. If you used the money from the HELOC to pay for home improvements or if the combined total of your first mortgage balance, and your HELOC doesn’t exceed $750,000, the interest may be tax deductible for homeowners.
Mortgage points and origination fees
Any origination fees and/or discount points you paid in association with a new mortgage in 2021 are considered prepaid interest and may be deducted if you itemize your deductions. Your closing documents will show what you paid in origination fees and points.
Mortgage insurance on your primary home
You may be able to deduct private mortgage insurance premiums (PMI) as an itemized deduction.
Households with adjusted gross incomes (AIG) of $100,000 or less are allowed to deduct 100% of their mortgage insurance premiums. The deduction is reduced by 10 percent for each additional $1,000 of adjusted gross household income, and is not available to households with earnings over $109,000.
Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50 percent of their mortgage insurance premiums. The deduction is reduced by 5 percent for each additional $500 of adjusted gross income, phasing out after $54,500.
Capital gains from selling a home
If you sold your main home and made a profit, you may be able to exclude that profit from your taxable income. Here’s how it works:
Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple filing jointly) as long as you have owned the home and lived in it for a minimum of two years. (The two years do not have to be consecutive. As long as you live in the house as your principal residence for at least 24 months in the five years prior to the sale, the deduction applies.
Generally, you can claim the exclusion only once every two years. Some exceptions do apply.
If you lived in your home less than 24 months, you may be able to exclude a portion of the gain. Exceptions are allowed if you sold your house because the location of your job changed, because of health concerns, or for some other unforeseen circumstance.
What aspects of buying a home are not tax deductible?
Mortgage insurance is not a deductible for second homes or rental property.
Typically the costs you paid to third-parties for such things as title insurance, appraisal fees, recording fees, etc. are not tax deductible.
Resources for more information
Those are just some of the highlights that might affect you as a homeowner or seller. Your tax advisor can answer specific questions, and you also can find more information here: