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For homeowners, understanding available tax deductions can lead to significant savings on your annual return. The most impactful benefits often include the mortgage interest deduction, property tax deductions (subject to limits), and the capital gains exclusion upon selling your primary residence. However, tax laws change frequently, and several key deductions have expired or been modified in recent years. This guide outlines the current tax benefits for homeowners, helping you identify which opportunities you can still claim based on the latest IRS regulations.
The ability to deduct mortgage interest remains one of the most valuable benefits of homeownership. You can typically deduct interest on mortgage debt up to $750,000 (or $1 million if the loan originated before December 16, 2017) used to buy, build, or improve your primary or secondary residence.
It is crucial to obtain your Form 1098 from your mortgage lender. This form details the exact amount of interest you paid during the tax year, which you will report on Schedule A of your tax return. Be aware that deductions for mortgage insurance premiums have expired for recent tax years and are no longer available to most taxpayers.
If you sell your primary home, you may exclude a substantial portion of the profit from your taxable income. To qualify, you must have owned the home and used it as your main residence for at least two of the five years leading up to the sale. The exclusion limits are up to $250,000 of gain for single filers and $500,000 for married couples filing jointly. This means a significant number of homeowners pay no federal taxes on the sale of their home.
You can deduct state and local property taxes paid on real estate, but this deduction is now subject to a cap. The Tax Cuts and Jobs Act of 2017 limited the total deduction for state and local taxes (SALT)—which includes property taxes and either income or sales taxes—to $10,000 per year ($5,000 if married filing separately). This limit is particularly important for homeowners in states with high property taxes.
When you inherit a property, you receive a "stepped-up basis." This means the home's cost basis for tax purposes is adjusted to its fair market value on the date of the original owner's death. For example, if your parents bought a home for $200,000 and it was worth $600,000 when you inherited it, your new basis would be $600,000. If you sold it immediately for that price, you would likely owe little to no capital gains tax. This rule remains a significant advantage for heirs.
While many energy-related deductions have expired, a key credit remains for larger installations. The Residential Energy Efficient Property Credit can be applied to the cost of qualifying systems like solar electric panels, solar water heaters, and geothermal heat pumps. This credit is available through 2023, though it is subject to phase-downs. It is always wise to check the IRS website for the most current details and eligibility requirements before making improvements solely for a tax benefit.
Key Takeaways for Homeowners:
