Owning a home is a big milestone, and while it offers stability for the homeowner, it also provides tax advantages. If you are a first-time homeowner or have owned property previously, understanding the tax benefits that are available can help manage costs and make good financial decisions.

Mortgage Interest Deduction

One of the most used tax benefits is the mortgage interest deduction. The interest you pay on the mortgage loan is generally tax-deductible and can help reduce your taxable income. If you want to use this deduction, you are required to itemize on your tax return. Homeowners who are married filing jointly can deduct interest paid on up to $750,000 mortgage balance; if they are filing separately, the limit is $375,000. The only mortgage interest that is not deductible is debt that was used to buy or improve your home.

Home Equity Loan Interest 

Home equity loans are essentially a second mortgage on your home. Homeowners can access the equity built in their home as collateral to borrow funds for other purposes. You can deduct interest paid on these loans and a line of credit only if the funds borrowed are used to pay for home improvements. Until 2017, it was allowed to deduct interest on these loans even if not used on home improvements.

Property Tax Deduction

Homeowners face property taxes at the state and local levels and have the benefit of being able to deduct these taxes. This falls under the SALT (state and local taxes) deduction. You can deduct the property taxes you pay on your primary residence, and in some cases, a second home. However, the SALT deduction has a cap. If you are married filing jointly with a MAGI under $500,000, you can deduct up to $40,000 of taxes, including property, income, and sales taxes. The cap changes to $20,000 if you are married filing separately as long as your MAGI is less than $250,000. These caps are to remain in place until 2030 when they will decrease again. This deduction can be more valuable in some areas than others.

Mortgage Insurance Premiums

Homeowners who have made a small down payment when the home was purchased might be paying for private mortgage insurance (PMI). The premiums that are paid for PMI could be deductible depending on income, and if the deduction has been extended by Congress that year. It is important to check the latest tax rules because this deduction tends to phase out for higher-income taxpayers.

Home Office Deduction

Homeowners can qualify for a home office deduction if they operate a business in their home. The size of this deduction depends on the percentage of their home dedicated to the place of business. It is required that the home office be used for regular and exclusive business use. So, if the room is used for other purposes or if you are working from home for an employer, it will most likely not qualify. You can deduct some of the expenses that are involved with maintaining the space where the home office is. These can include mortgage interest, utilities, repairs, and more.

Home Improvements

Necessary Home Improvements

As long as homeowners are making improvements that are necessary, they can qualify as a tax deduction. Just updating a room that is functioning fine already will most likely not qualify for this deduction. Permanent improvements, like making a home accessible for medical reasons, will qualify as a deduction.

Energy Efficiency Tax Credits

Making energy efficient improvements to your home can also result in a tax benefit. Homeowners gain credits from this instead of deductions. These credits can help directly reduce taxes owed and that can help offset the upfront costs of making improvements. If a homeowner has installed solar panels, upgraded insulation, replaced old windows, or purchased an HVAC system, they might be eligible for residential energy tax credits. The amount you can claim depends on the type of improvement and when it was completed.  Energy tax credits are only available in 2025, the credits will not continue after December 31, 2025.  Check with your tax professional for details on the energy tax credits.

Capital Gains Exclusion When Selling

Selling your home can also help with tax deductions. If the home is sold for a profit, you might not need to pay taxes on all of the profit. The home must have been used as the primary residence for at least two of the last five years to be eligible to keep some of the profits without tax obligation. If you are married filing jointly, you can keep up to $500,000, and if you are single or married filing separately, each party can keep $250,000.  There will be taxes on a portion of the gain if you claimed the home office deduction during the time you owned the home.

Contact Us Today

Understanding the tax benefits of homeownership can help you make more informed financial decisions and maximize your savings. Call us at 203-489-0612 to discuss how these deductions and credits apply to your situation.

Written by: Roisin McGuirk