What are the tax benefits of owning a home?

There are a number of tax benefits to owning a home. Many of them only apply to taxpayers who itemize their deductions on their tax return, but there are a few that apply to anyone. And the biggest tax perk of all? It actually comes when you’re ready to sell your home and move on.

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Tax benefits of owning a home

Owning a home comes with several tax benefits, which can help offset maintenance and improvement costs. In many cases, these advantages come in the form of tax deductions, which can only be used if your total deductions exceed the standard deduction for your filing status. 

In 2023, the standard deduction is $13,850 for single filers and $27,700 for those who are married filing jointly. Even so, many of these home-related deductions could still apply. Here are seven to check out.

Mortgage interest 

When you use a home loan to buy your house, you can deduct the mortgage interest from your taxable income each year, as long as you itemize your taxes instead of taking the standard deduction. 

The limit to how much you can deduct depends on three factors: 

1. Your tax filing status
2. Your mortgage amount
3. When you purchased your home

For homeowners who purchased their home on or after Dec. 16, 2017, you can deduct the interest portion of your mortgage payment on the first $750,000 for married couples or the first $375,000 for single tax filers. 

If you purchased the property prior to Dec. 16, 2017, your home mortgage interest is deductible on balances of up to $1 million for married taxpayers and $500,000 for single filers.

Through 2021, there was also a separate tax deduction for private mortgage insurance (PMI), but that benefit was not extended for 2022 and beyond. 

Prepaid mortgage points

Some new homeowners purchase mortgage discount points as part of their closing costs when they take out a mortgage. They’re essentially paying additional money now in exchange for a lower interest rate and monthly payment for the life of the loan. 

The IRS considers these prepaid mortgage points as interest. Depending on the specifics of your situation, you may be able to deduct the full amount as an itemized deduction in the year you took out the mortgage. The IRS provides a matrix to help you determine whether you’re eligible to deduct the full amount in one year, or if the deduction needs to be spread out over several tax years. 

Home equity loan interest

Some homeowners may also qualify to deduct the interest from a home equity loan. However, in order to be eligible, the funds must be used to substantially improve your primary residence. 

So if you take out a home equity loan to pay for your kid’s college tuition or fund a wedding, this deduction doesn’t apply. But if you use the loan funds to renovate your kitchen or convert a basement into a finished living space, then you could deduct the home equity loan interest. 

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Property taxes

Any state or local taxes charged on real estate are generally deductible up to a certain limit. Combined with other eligible income, sales, or property taxes, you can deduct up to $10,000 per year for a married couple who files jointly, and $5,000 for a single tax filer. 

Some states tax other personal property, like cars and boats as well. Any taxes you pay on those items are also applied to your annual deduction limit. 

Self-employed home office expenses

Small business owners who use part of their home for work may be eligible to deduct a portion of their home expenses on their taxes. Note that this home office deduction doesn’t apply if you’re an employee and working remotely. 

In order to qualify, the IRS requires that the area of your home is the principal place regularly and exclusively used for conducting business. 

To determine the deduction amount, you must calculate the square footage of your work space compared to the rest of the home. Then you can deduct that percentage of total eligible expenses, like insurance, utilities and even repairs. 

Medically necessary improvements

Any improvements made to your home because of a medical condition for you, your spouse or dependents may be eligible as a tax deduction as well. It’s only considered a partial deduction if the update increases the value of your home. But if there’s no impact to the property value, you could deduct the entire expense. 

Here are some examples of eligible medical home improvements:

• Adding wheelchair ramps for entrance and exit
• Widening doorways
• Installing bathroom railings or support bars
• Flattening the ground outside
• Installing lifts (although the IRS notes that elevator installation typically counts as increasing property value)

Capital gains exclusion

One of the biggest tax savings opportunities when owning a home actually comes when you sell your primary residence (not a second home). Many homeowners qualify for a capital gains tax exclusion, which means you may not have to pay any taxes at all on the profit (aka capital gain) you make on the house. 

Here’s what you need to qualify for this mega tax benefit:

• You’ve owned the home and used it as your primary residence for at least two of the last five years
• You haven’t used this exclusion for another property in the last two years

The exclusion limit is $250,000 for single filers and $500,000 for those who are married and file taxes jointly. Remember that these limits aren’t referring to the sales price of your home, just the profit. So it’s the amount over what you paid for your home, minus any real estate agent fees. 

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