7 tax deductions for homeowners to lower their income tax

Buying a home can be very expensive. First, there’s the down payment. Then there are closing costs, including fees for an appraisal, inspection and title search. And once you own it, the expenses continue to add up, including maintenance, taxes and insurance.

There are some tax benefits to owning a home, though. Tax-deductible homeowner costs can reduce the amount of income tax you have to pay.

What is a tax-deductible expense?

A tax-deductible expense is one that you can deduct from your adjustable gross income when you file your taxes for the year. Deducting these costs reduces your taxable income, and the lower your taxable income, the less you’ll pay in taxes.

When looking at potential homeowner-tax deductions, it’s crucial to know the differences between standard and itemized deductions.

A standard deduction is a specific dollar amount that reduces the amount of income on which you’re taxed, based on your filing status, age, and other variables. Itemized deductions include each individual deduction, such as certain homeowner expenses and charitable donations. When filing your income taxes, you must choose either the standard deduction or itemized deductions, not both.

For the 2023 tax year, the standard deductions are:

• Single or married filed separately: $13,850
• Married filing jointly or eligible widow/widower: $27,700
• Head of household: $20,800

If itemized deductions would decrease your taxable income by more than the standard deduction, you’ll probably want to include the following deductions for homeowners to save even more money. 

7 tax deductions for homeowners

1. Mortgage interest

Each month, part of your mortgage payment goes toward the principal (the amount you borrowed), and another portion covers interest. Over the entire life of your loan, you can deduct interest paid on up to $750,000 of your principal balance if you’re single or married and filing taxes jointly. If you’re married filing separately, you may deduct interest paid on up to $375,000 each.

There are some exceptions to this. If you bought your home between October 14, 1987, and December 15, 2017, you can deduct interest paid on up to $1 million over the life of your mortgage. If you bought it before October 14, 1987, you’re allowed to deduct all paid interest.

2. Home equity loan interest

A home equity loan is a second mortgage, where you borrow against the equity you have in your home. If your home is worth $350,000 and you still owe $300,000, you have $50,000 of equity, for example.

As with your first mortgage, the interest you pay on your home equity loan could be tax-deductible. There are no restrictions on how you can use the cash from a home equity loan, but the interest is only tax-deductible if you use the money on substantial home improvements.

3. Discount points

You have the option to pay a fee, referred to as “discount points,” at closing that lowers the interest rate you’ll pay on your mortgage. One discount point usually costs 1% of your new mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5%, and you pay $4,000 for two discount points, your new interest rate is 3%.

The money you pay for discount points is typically tax-deductible over the life of the loan. If you meet a bunch of Internal Revenue Service requirements, your discount points may be fully deductible in the year that you pay them.

4. Property taxes

You can deduct up to $10,000 per year in paid property taxes if you’re single. You’re able to deduct up to $5,000 each if you're married filing separately, or $10,000 if you’re married filing jointly. This limit applies to both local and state income and property taxes combined.

5. Mortgage insurance

Mortgage insurance payments were previously tax deductible, but they’re no longer deductible for the 2022 tax year. If you’re filing amended returns for previous tax years, you may be able to get this deduction for those years going back to 2018.

6. Home improvements

Necessary improvements to your home may be tax-deductible. For example, you might need to update the home for medical reasons or to make the home accessible for someone with disabilities. These expenses may be deductible if the updates are made to accommodate you, your spouse, or a dependent.

7. Home-office costs

You may deduct home-office costs if you run a business out of your home and use the space exclusively for business. However, you can’t deduct expenses if you work from home for an employer. The amount you can deduct depends on how large your office space is relative to the rest of your home.

What homeowner expenses are not tax-deductible?

You can never deduct any of the following expenses from your adjustable gross income:

• Loan-origination points
• Title insurance
• Closing costs
• Down payment
• Forfeited earnest money

You might be able to deduct some of the following expenses — but only if they are related to your home-office deduction in certain circumstances. If you’re wondering about any of these costs, it's best to ask a tax specialist.

• Homeowners insurance
• Fire insurance
• Homeowners association fees
• Utilities
• Refinancing costs
• Depreciation of the home
• Domestic services

Add up your tax deductions in the eight eligible categories to find out whether an itemized deduction would save you more money than a standard deduction. If you have questions, reach out to a tax specialist for assistance.

 

This article was written by Laura Grace Tarpley and Cepf from Business Insider and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.