What are the Tax Benefits of Owning a Home?

sign that says the word taxes sitting on cash

If you’re in the market for your first home, you may be trying to get a complete picture of how owning a home will affect your finances. One question you may have—what are the tax benefits of owning a home? 

Owning a home can provide you with significant tax benefits. It’s important to learn how home ownership can impact your taxes so you know which home-related expenses to claim on your returns for maximizing your savings potential.

How does an income tax deduction work?

Before we explore the specifics, let’s review how an income tax deduction works. A deduction reduces your taxable income by a percentage, which depends on your tax bracket. You can choose to take the standard deduction ($12,550 for individuals filing as single taxpayers, or $25,100 for married couples filing jointly) or to itemize your deductions, which involves listing each eligible deduction separately. After adding up the total of your itemized deductions, you’ll multiply that amount by your tax bracket for your total deduction. Now, let’s take a deeper look at the tax benefits of owning a home.

Tax benefits of buying a home

Purchasing a home offers the buyer several tax benefits. First, you can generally deduct the cost of the points you paid when securing your mortgage. Mortgage points are fees paid to the lender in exchange for a reduced interest rate. In other words, you’re paying some interest up front in exchange for a lower interest rate. Typically, each point you purchase costs 1 percent of your total loan amount. For example, you’d spend $1,000 per point for each $100,000 of your total loan amount. These points may be tax deductible as home mortgage interest, if you itemize deductions. If you’ve refinanced your original mortgage and paid points when taking out your new loan, the cost of these points may be deducted as well.

Second, if you’re an active-duty member of the armed services, you may be able to deduct your moving expenses from your taxable income. However, this tax perk is limited to active servicepeople who need to move because of a permanent change of station due to a military order.

Tax benefits of owning a home 

There are multiple ongoing tax benefits to owning a home.

  • Mortgage interest deduction
    Most homeowners can deduct the interest payments they make on their mortgage from their taxable income. There may be limits on how much you can deduct, which is dependent on how large your loan is.
  • Real estate taxes
    The money you pay in property taxes is deductible from your taxable income. If you pay through a lender escrow account, you’ll find the tax amount on your 1098 form. If you pay your taxes directly to your municipality, use your personal records, such as a copy of a check or automatic transfer, as proof.
  • Private Mortgage Insurance (PMI)
    If you took out a loan that was equal to less than 20% of the home’s value, you may be able to deduct your PMI payments from your taxable income. This deduction depends on your adjusted gross income (AGI). If you’re single and your AGI is less than $50,000, you’re eligible for the PMI deduction. For married couples filing jointly, the threshold is $100,000. Once you’ve reached the max income allowed for the PMI deduction, the amount you can deduct begins to phase out. 
  • Home equity debt
    If you’ve taken out a Home Equity Loan or Home Equity Line of Credit (HELOC) against your home, the interest payments on these loans can be deducted from your taxable income, as long as the loan is used, in the words of the IRS, “to buy, build or substantially improve the taxpayer’s home that secures the loan.”
  • Home office expenses
    If you use a part of your home exclusively for work purposes, you may be able to deduct related expenses.

Are there any tax credits available for homeowners?

Unlike a tax deduction, a tax credit directly lowers your tax bill, dollar for dollar. You may be eligible for a mortgage credit if you were issued a qualified Mortgage Credit Certificate (MCC) by a state or local government unit or agency under a qualified MCC program. The MCC is an assistance program created to help lower-income families afford to buy a home.

In addition, depending on your home state, you may be able to claim a credit for a percentage of the costs of buying and installing items that help your home harness renewable energy, such as solar panels or geothermal heat pumps.

Home ownership comes with many advantages, some of which include tax benefits. Keep that in mind as you explore your options, and as with all tax advice, please remember to consult a tax professional for the most current and accurate laws.