NEPA Real Estate Corner

Tax Benefits for Homeowners: What You Need to Know

Apr 11, 2023 | Helpful Homeowner Hints

Take advantage of these tips to save money on your taxes this year!

For a long time, people have considered real estate a stable investment and an essential component of building wealth. As a homeowner, you have access to a range of tax benefits that can help reduce your overall tax burden and increase your net worth. However, navigating the complex world of tax law can be challenging. Many homeowners are unaware of the deductions and credits available to them.

As the famous real estate magnate and investor, Andrew Carnegie, once said, “Ninety percent of all millionaires become so through owning real estate.” With the right knowledge and strategy, homeownership can indeed be a pathway to financial success.

In this blog post, we provide an overview of the tax benefits available to homeowners, including the mortgage interest deduction, property tax deduction, home office deduction, energy efficiency tax credits, and capital gains tax exclusion. We will explore how to calculate these deductions, limitations and qualifications, recent changes to the tax code, and more. By the end of this post, you will have a better understanding of the tax benefits available to you as a homeowner and how to take advantage of them.


Overview of Tax Benefits for Homeowners


Owning a home comes with many benefits, and one of the most significant advantages is the ability to take advantage of a range of tax deductions and credits. Here are some statistics that highlight the importance of understanding these tax benefits:

  • Mortgage Interest Deduction: According to the IRS, in 2019, over 25 million taxpayers claimed the mortgage interest deduction, with an average deduction of over $11,000 per return.
  • Property Tax Deduction: In 2019, taxpayers claimed over $306 billion in property tax deductions, with an average deduction of over $2,000 per return.
  • Home Office Deduction: With the rise of remote work during the COVID-19 pandemic, the home office deduction has become more relevant than ever. According to the National Association of Realtors, as of August 2020, over 20% of buyers were looking for homes with space for a home office.
  • Home Energy Efficiency Tax Credits: Homeowners who make energy-efficient improvements to their homes may be eligible for tax credits. These credits can help offset the cost of upgrades such as installing solar panels, geothermal heat pumps, or energy-efficient windows and doors. The credits are typically worth 10% of the cost of the upgrade, up to a maximum of $500 or $1,000, depending on the improvement.
  • Capital Gains Tax Exclusion: According to the National Association of Realtors, in 2020, the median home price in the U.S. was $296,500. If you sell your primary residence and meet certain qualifications, you can exclude up to $250,000 of the capital gains from your taxable income (or up to $500,000 if you file jointly with your spouse).

By taking advantage of these tax benefits, homeowners can save thousands of dollars on their tax bill each year. In the following sections, we’ll dive deeper into each of these tax benefits and how you can qualify for them.


Mortgage Interest Deduction


As discussed in the previous section, the mortgage interest deduction is one of the most significant tax benefits available to homeowners. This deduction allows you to deduct the interest paid on your mortgage from your taxable income, reducing your overall tax liability. Here’s what you need to know about the mortgage interest deduction:

  • Qualifications: To qualify for the mortgage interest deduction, you must have taken out a mortgage to buy, build, or improve your home, and the mortgage must be secured by your primary or secondary residence. Additionally, the mortgage must be on a qualified home, which includes a house, condominium, cooperative, mobile home, boat, or similar property.
  • Calculation: You can deduct the interest paid on a mortgage of up to $750,000 if you’re married filing jointly or $375,000 if you’re filing separately. If your mortgage exceeds these limits, you may still be able to deduct a portion of the interest.
  • Other Considerations: If you’re taking out a mortgage for the first time, be aware that recent changes to the tax code may affect your deduction. Under the Tax Cuts and Jobs Act of 2017, the standard deduction was nearly doubled, meaning that fewer taxpayers are itemizing their deductions. Additionally, the deduction for home equity interest was eliminated, with few exceptions.

It’s essential to keep accurate records of your mortgage interest payments throughout the year to ensure that you’re claiming the correct deduction on your tax return. In the next section, we’ll explore another valuable tax benefit for homeowners: the property tax deduction.


Property Tax Deduction


In addition to the mortgage interest deduction, another tax benefit available to homeowners is the property tax deduction. As a homeowner, you are responsible for paying property taxes to your local government, which are based on the assessed value of your home. Here’s what you need to know about the property tax deduction:

Did you know you can deduct your property taxes from your income tax?

  • Qualifications: To qualify for the property tax deduction, you must have paid property taxes during the tax year. Additionally, the taxes must have been levied on a property that you own and that you use as your primary residence.
  • Calculation: You can deduct the total amount of property taxes paid during the tax year, up to a maximum of $10,000 ($5,000 if married filing separately).
  • Other Considerations: Like the mortgage interest deduction, the property tax deduction is an itemized deduction. This means that you’ll need to decide whether to itemize your deductions or take the standard deduction. If you have significant deductions, such as mortgage interest, charitable contributions, and medical expenses, you may benefit from itemizing your deductions. However, if your deductions are relatively low, you may be better off taking the standard deduction.

It’s important to note that property taxes vary widely depending on where you live. According to the Tax Foundation, the average property tax rate in the United States is 1.07%, but rates can range from less than 0.1% to over 2.5%. By deducting your property taxes on your tax return, you can offset some of the costs of homeownership.

The next section will explore a tax benefit that people often overlook but can be significant: home office deductions.


Home Office Deductions


If you use part of your home for business purposes, you may be able to deduct expenses related to that space. Individuals refer to this deduction as the home office deduction.

Look no further than your home office for additional tax savings.

  • Qualifying for the Deduction: To qualify for the deduction, the space must be used exclusively and regularly for business purposes, and it must be your principal place of business.
  • Deductible Expenses: There are two types of home office expenses that could potentially be deducted from your overall tax liability; direct and indirect.
    1. Direct Expenses: Expenses that are incurred only for the business part of your home, such as painting or repairs in the home office.
    2. Indirect Expenses: Expenses that are incurred for the entire house, but only a portion of them can be attributed to the home office. This includes things like mortgage interest, utilities, and insurance.
  • Calculating the Deduction: The deduction is calculated based on the percentage of your home that is used for business purposes. You can use either the simplified method or the regular method to calculate the deduction.
  • Benefits of the Deduction:
    1. The home office deduction can result in significant tax savings.
    2. According to the IRS, there were 3.4 million tax returns claiming the home office deduction in 2019.
    3. The average deduction for a home office in 2019 was $2,375.
    4. The total amount of deductions claimed for home offices in 2019 was $8 billion.

As former U.S. Secretary of the Treasury, Timothy Geithner said, “The difference between tax avoidance and tax evasion is the thickness of a prison wall.” By taking advantage of legitimate deductions, such as the home office deduction, you can save money on your taxes without risking any legal trouble.

Next, let’s discuss the tax implications and benefits you may take advantage of when it comes time to sell your home.


Capital Gains Tax Exclusions


One of the biggest financial benefits of owning a home is the ability to take advantage of capital gains tax exclusions when you sell your home. Capital gains tax is a tax on the profit you make from selling an asset, such as a home. In 2021, the average gain on a home sale was $68,843, according to ATTOM Data Solutions. However, the good news is that the government offers exclusions on capital gains tax for homeowners who sell their primary residence.

The IRS affirms that a single homeowner can exclude up to $250,000 in capital gains tax, whereas married homeowners who file a joint tax return can exclude up to $500,000. To qualify for this exclusion, you must have owned the home for at least two of the last five years, and the home must have been your primary residence for at least two of the last five years.

Please note that homeowners can only use this exclusion once every two years, and any gains exceeding the exclusion amount will be subject to capital gains tax. However, if you have owned and lived in your home for many years, it’s possible that your gains will be below the exclusion amount, meaning you won’t owe any capital gains tax when you sell.

As you can see, the capital gains tax exclusion can be a significant financial benefit for homeowners who sell their homes. By taking advantage of this exclusion, you can keep more of the money you earn from selling your home.

Finally, it’s worth talking a look at newly created tax incentives for making energy efficiency upgrades to your home.


Home Energy Tax Credits


Another tax benefit that homeowners can take advantage of is home energy tax credits. The purpose of these credits is to encourage homeowners to make energy-efficient improvements to their homes. Here’s what you need to know:

  • Qualifications: To qualify for home energy tax credits, you must make qualifying improvements to your home, such as installing insulation, windows, doors, or a new HVAC system. The improvements must meet certain energy efficiency standards to be eligible for the credit.
  • Calculation: The amount of the credit varies depending on the type of improvement you make and the cost of the improvement. The credit is typically a percentage of the cost of the improvement, up to a certain dollar amount. For example, the credit for installing energy-efficient windows is 10% of the cost of the windows, up to a maximum credit of $200 per window (or $500 total for all windows).
  • Other Considerations:

    Lowering your energy bills can also save you money on your taxes!

    Home energy tax credits are non-refundable, which means that one can only use them to offset your tax liability. Additionally, some credits are only available for a limited time, so it’s important to take advantage of them while they’re still available.

According to the U.S. Department of Energy, the average homeowner can save up to 30% on energy bills by making energy-efficient improvements to their home. Additionally, the Residential Energy Services Network reports that homes that are energy-efficient sell for an average of 2.7% more than homes that are not.

By taking advantage of home energy tax credits, you can not only save money on your energy bills, but also increase the value of your home. In the next section, we’ll summarize the key takeaways from this article.


Key Takeaways


It’s clear that tax benefits are just one of the many perks of owning a home. From deducting mortgage interest and property taxes to taking advantage of home office deductions, homeowners have many opportunities to save money on their taxes. So don’t overlook the significant benefit of the exclusion for selling a primary residence when it comes to capital gains taxes.

Benjamin Franklin once famously stated that nothing in this world can be regarded as certain, except for death and taxes. With a little knowledge and careful planning, you can at least make the tax part a little less painful. So go forth, enjoy your home, and take advantage of those tax benefits!