11 Homeowner Tax Breaks That Could Help You Save This Year

Disclaimer: As a friendly reminder, information in this blog post is meant to be used as helpful advice and for educational purposes only. It is not to be taken as tax or legal advice. If you have a question about your homeownership tax breaks, please consult a skilled CPA.

Owning a home is a major investment — not just mortgage payments and property taxes, but gutter cleaning, landscaping, and other maintenance bills add up. Not to mention the unexpected busted water heater or leaky roof.

Luckily, U.S. tax laws give many homeowners a break by lowering the tax burden through deductions, exclusions, and credits. Tax benefits could translate into less money owed to Uncle Sam, leaving more cash in your pocket to fund tomato plants for the victory garden you’re planning this spring.

We interviewed Certified Public Accountant (CPA) and Certified Financial Planner (CFP®) Anjali Jariwala, founder of FIT Advisors and Investments News 40 Under 40 award winner, to help us wade through potential tax benefits. We also chatted with Jordan Bennett, a former CPA and top Orange County real estate agent who sells homes 52% faster than the average agent, for additional insight.

Keep in mind that the IRS tax code is riddled with exceptions and limits, and tax laws change frequently. Consult your licensed tax professional to confirm whether your situation qualifies for a specific tax break.

Itemized tax deductions that benefit homeowners

A tax deduction reduces your tax bill by lowering your total taxable income. The IRS allows taxpayers to choose between two options: standard deductions and itemized deductions. The standard deduction is the IRS-allowable flat dollar amount you claim, no documentation required. The IRS determines your standard deduction based on your filing status — whether you’re classified as single, married (filing jointly or together), or head of household. The tax code stipulates adjustments to the standard deduction if you were born before 1955, are blind, or are considered a dependent . Itemized deductions, on the other hand, require a paper trail in the form of receipts and supporting documentation.

You can choose only one — standard or itemized. If you select the standard deduction, you give up the option to itemize, or write off, expenses such as mortgage interest and charitable donations to the Salvation Army. Most people opt for the standard deduction: 87.3% of U.S. taxpayers claimed the standard deduction for the 2018 tax year.

Which should you choose? Jariwala recommends tallying your itemized deductions to find out which number is higher, the standard IRS deduction for the tax year or itemized deductions. (You want the higher number. Remember, you’re trying to reduce your taxable income.)

“Usually tax software systems will calculate the number both ways, so you can see which one is more beneficial,” Jariwala adds.

When you’re figuring out whether standard or itemized deductions are the best option for your situation, don’t forget to factor in the following list of tax deductions for homeowners.

State and local tax deductions

Often referred to as SALT, state and local taxes include personal income tax, state sales tax, and other taxes levied by the local government. The property tax you pay on your home is also considered SALT.

The IRS allows you to deduct property taxes that benefit the general public, such as school assessments. What’s not deductible? Taxes you pay that benefit just your home, such as a home energy system that’s listed as an assessment on your property tax bill. Also, assessments for streets, sidewalks, and sewer lines are not tax deductible.

If you live in a state with a high cost of living (such as California and New York), there’s a chance you won’t be able to write off all of the SALT taxes you paid, even if the taxes were eligible for deduction. Why? The Tax Cuts and Jobs Act of 2017 caps the amount you can claim as a SALT deduction to $10,000 ($5,000 if you’re married and filing separately).

Unlike rent, interest you pay on your mortgage loan is deductible

If you’re like most homeowners, you dream of your last mortgage payment when you’ll finally own your home free and clear. Until then, take solace in the tax benefit of making monthly mortgage payments. If your mortgage loan (or loans, if you have more than one) is secured by your primary residence or a vacation home, you can usually deduct the mortgage interest you paid as an itemized deduction.

Watch for a Mortgage Interest Statement (form 1098) from your lender if you paid more than $600 in mortgage interest during the previous tax year. The document specifies the amount of interest you paid on your mortgage loan.

Like SALT deductions, there are limits to mortgage interest deductions. If you took out a mortgage loan after December 15, 2017, you can only write off interest for up to the first $750,000 ($375,000 if married and filing separately) of mortgage debt. If your mortgage is dated on or before December 15, 2017, the limit is higher — $1 million ($500,000 if married and filing separately).

Deduct mortgage insurance payments if you’re under the income cap

If you took out a mortgage to buy your home after 2006, you can deduct mortgage insurance (MI) as you would mortgage interest. Mortgage insurance issued through the Federal Housing Administration (FHA), the Rural Housing Service, and private insurance providers qualify, as does the funding fee paid on a Veterans Affairs (VA) loan. Write off MI or the funding fee as an itemized deduction. Like mortgage interest, any MI you pay over the tax year will be listed on your lender-issued Mortgage Interest Statement.

Not everyone is eligible for the MI tax deduction. If your adjusted gross income exceeds $100,000 ($50,000 if married and filing separately) for the tax year, your deduction may be limited. And if you make over $109,000 ($54,500 if married and filing separately) – you aren’t eligible for the MI tax deduction if your income exceeds that amount.

Write off HELOC interest when you buy or renovate your house

Many homeowners don’t have spare cash on hand for a major renovation, and some owners leverage their home equity in the form of a  home equity line of credit (HELOC) to finance pricey remodels. Similar to a credit card, a HELOC’s revolving line of credit allows owners to borrow against, pay down, and re-access funds during the loan’s draw period.

Like other mortgage loans, you can deduct the interest you pay on a HELOC (and a home equity loan, if you have one) — as long as the funds were used to “buy, build, or substantially improve your home.”

What constitutes a substantial improvement? The IRS doesn’t specify a dollar amount, but your renovation project must add value to your home, prolong the life of your home, or adapt your home to a different use. Maintenance repairs toward general upkeep, such as repairing a plumbing leak or replacing a window, don’t qualify. Repainting your home is considered maintenance and doesn’t qualify, but if you repaint your home as part of a substantial renovation, you can include the cost as an improvement.

Examples of substantial improvement include:

• Adding on to your home
• Converting an unfinished basement into an in-law unit
• Replacing the roof

Did you use HELOC funds to demo your 1980s kitchen and replace it with the French country  design you always dreamed of? The interest on your HELOC is eligible for tax deduction. But you’re out of luck if you used your HELOC to pay off your Land Rover. HELOC interest used for consolidating personal debt can’t be written off on your tax return.

And if you used your HELOC to pay for both your kitchen remodel and pay off debt? You have some tricky math ahead of you. Complete the IRS worksheet to parse out how much you’re eligible to deduct.

Treat medical-related home renovations as deductible medical expenses

If you renovated your home for the purpose of medical care for you, your spouse, or a dependent, you can claim the cost of improvements as an itemized deduction. List the write-off as a capital medical expense on Schedule A of your tax return. As with other medical and dental deductions, you can only claim expenses that exceed 7.5% of your adjusted gross income.

Examples of eligible medical-related renovations include:

• Widening hallways and doors in your home to accommodate a wheelchair
• Installing ramps for wheelchair accessibility
• Lowering or modifying kitchen cabinets

Write off your home office space if you’re an entrepreneur or side hustler

Are you self-employed, file a Schedule C on your tax return, and work out of your spare bedroom? If so, you may be eligible for a home office tax deduction, which allows business owners to deduct expenses related to the use of their home. In fact, the home office deduction isn’t limited to just homeowners — renters qualify, too.

You may be eligible for the home office deduction if:

• You’re a self-employed business owner or freelancer (Sorry W-2 employees! You’re probably not eligible).
• Your home office space is for the exclusive and regular use of your business (with the exception of space used to store items for your business).
• Your home is your principal place of business, you meet clients in your home, or your home office is a separate structure from your home.

Calculating your home office deduction can be tricky. You have the option to document your actual home expenses and prorate the amount based on business use. Or calculate your home office deduction using the simplified method: Multiply the square footage of your home office (up to a maximum of 300 square feet) by the IRS-designated amount of $5.

Claim moving expenses if you’re an active military member

Uprooting and moving to a new location is a way of life for those who serve. If you received orders to relocate as an active duty member of the armed forces, you could be eligible to deduct (unreimbursed) moving expenses on Schedule 1 of your 1040 tax return. Eligible expenses include reasonable storage and traveling expenses, as well as lodging. Unfortunately, the steak dinner you had en route doesn’t qualify. Meals aren’t tax deductible as a moving expense.

If you recently ended active duty, moving expenses from your last post to your hometown (or a place closer to the U.S.) still qualify, as long as you incurred the expense within one year of ending active duty.

Offset income from renting out your home by deducting rental-related expenses

Did you pick up extra cash last year by renting your home while you took that trip to Tahiti? Rental marketplaces such as Airbnb and VRBO have made it easy for homeowners to rent out a spare bedroom or an entire house as short-term lodging. While the incoming rent could be taxable, you can deduct certain expenses to help offset the extra income.

If you rented your home for part of the year, you can deduct expenses such as mortgage, insurance, taxes, maintenance, utilities, and insurance. Log the number of days you rented your home versus the days of personal use. Then list rental expense deductions on Schedule E of your 1040.

Tax credits and exclusions

In addition to deductions, tax benefits come in two additional categories: credits and exclusions.

Tax credits directly reduce your overall tax bill, compared to a tax deduction, which reduces your taxable income. “A tax credit is more powerful than a tax deduction,” says Bennett, “because it goes dollar for dollar against any tax that you owe.” For example, if you owe the IRS $2,000 and claim a $500 tax credit, your final tax bill drops to $1,500.

Tax exclusions and deductions are similar in that both reduce your taxable income. However, itemized deductions decrease taxable income by subtracting eligible expenses, while exclusions allow you to omit eligible income from taxation. The capital gain exclusion is a major benefit for home sellers.

Sell your home without being taxed with a capital gain exclusion

The excitement of selling your house at a market high diminishes quickly when it’s time to write a check to Uncle Sam for the capital gain. Fortunately, the IRS gives homeowners a major break in the form of a capital gain tax exclusion.

Let’s say you purchase your home for $250,000. Three years later, you sell at a market high for $400,000. Without the capital gain tax exclusion, you’d be on the hook to pay taxes on the $150,000 gain. But the exclusion does just as its name implies — it excludes the gain from your taxable income. Home sellers can exclude up to $250,000, or $500,000 if married and filing jointly.

Bennett recommends keeping careful records when you make improvements to your home, because it can make a difference if you exceed the capital gain exclusion limits. For example, if you purchased a home for $1 million and sold it years later for $2 million, you could be required to pay capital gains tax on $750,000 (the gain of $1 million minus the IRS tax exclusion of $250,000 as a single taxpayer). However, if you spent $400,000 renovating your house over the years, you could add that amount to the cost basis of your home. Instead of the $1 million purchase price, your tax cost basis would be $1.4 million. Translated, you’d owe tax on a $350,000 gain instead of $750,00.

Sellers must meet ownership and residency requirements to claim the capital gains exclusion. In general, if you lived in and owned your home for at least twenty-four months in the last five years before selling, you’ll qualify. You can exercise the capital gains exclusion once every two years.

Exclude forgiven mortgage debt from your income tax return

In general, if you borrow money that you’re legally obligated to repay and the lender cancels the debt — by forgiving the entire amount or reducing the amount you’re required to pay —  the amount of the loan you didn’t repay could be taxed as income. For homeowners, examples of canceled debt can include a foreclosure, short sale, or loan modification.

However, the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) offers relief for those caught in the Great Recession and a struggling real estate market. If a lender canceled the debt due to a drop in property value or a change in the homeowner’s financial situation, the homeowner can exclude up to $2 million of eligible canceled debt ($1 million if married and filing separately) from their income tax return.

The exclusion applies to your primary home only — vacation homes and rental properties do not qualify. Also, the lender must have discharged the debt prior to January 1, 2021 to be eligible.

Install energy-efficient equipment in your home and claim a tax credit for helping the planet

Homeowners who care enough about the environment to install energy efficient equipment at home often benefit with lower energy bills and lower energy usage, which could have a positive impact on the environment. In some cases, you’ll also earn the benefit of a tax credit. For the 2020 tax year, the IRS offers two types of energy tax credits.

The residential energy efficient property credit

If you installed alternative energy equipment at your home, you claim a percentage of the amount you spent on eligible energy-efficient equipment. The percentage varies depending on the year of installation. For example, if you installed a solar water heater in the 2020 tax year, claim 25% of the cost of equipment as a tax credit. If the solar water heater was installed in the 2021 tax year, you may claim 22%.

Eligible equipment for the residential energy efficient property credit:

• Solar electricity
• Solar water heaters
• Geothermal heat pumps
• Small wind turbines
• Fuel cell equipment ($500 limit)

While roofing generally doesn’t apply, dual-purpose solar tiles and shingles may qualify.

The nonbusiness energy property credit

If you renovated certain areas of your home for energy efficiency, you could be eligible for an energy property credit. The IRS categorizes eligible expenses into two categories: improvements and expenditures.

Homeowners who installed eligible improvements during the tax year can claim 10% of the cost as a tax credit. The 2018-2020 lifetime credit is limited to $500. The cap for energy efficient windows is $200.

Eligible improvements include:

• Energy-efficient windows, doors, skylights
• Roof (metal and asphalt)
• Insulation

If you installed equipment that meets residential energy property expenditure guidelines, you can claim up to $500 as a tax credit.

Eligible expenditures include:

• Heating/AC (energy-efficient)
• Water heater (natural gas, propane, oil)
• Biomass stove

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