Do Homeowners Get Tax Breaks? What Qualifies
Homeownership offers unique tax considerations. Learn how ongoing expenses, property improvements, and an eventual sale can impact your annual tax liability.
The federal tax code offers several benefits that can help offset the expenses of homeownership and lower a homeowner’s tax liability. These tax provisions cover various aspects of owning a home, from the initial purchase to ongoing costs and the eventual sale.
Deductible Expenses from Owning a Home
The mortgage interest deduction allows homeowners to subtract the interest paid on a home loan from their taxable income. This applies to mortgage debt used to buy, build, or substantially improve a primary or second home. For mortgages taken out after December 15, 2017, interest on up to $750,000 of mortgage debt is deductible.
Homeowners can also deduct state and local taxes, primarily property taxes. However, the state and local tax (SALT) deduction is capped. This rule limits the total deduction for all state and local taxes, including property, income, and sales taxes, to $10,000 per household annually.
Mortgage points, which are fees paid to a lender for a lower interest rate, may also be deductible. One point equals 1% of the loan amount. Points paid on a mortgage to purchase or build a primary home are fully deductible in the year they are paid. For a refinanced mortgage, the deduction for points must be spread out over the life of the loan.
Tax Credits for Home Improvements
Homeowners can benefit from tax credits, which provide a dollar-for-dollar reduction of taxes owed. The Energy Efficient Home Improvement Credit is 30% of the cost of qualifying improvements, with an annual limit of $1,200. Specific improvements have their own caps, such as $600 for new windows and skylights and $500 for exterior doors. A separate annual limit of $2,000 applies to electric or natural gas heat pumps, biomass stoves, and boilers.
The Residential Clean Energy Credit covers 30% of the cost of new, qualified clean energy property with no overall credit limit. Qualifying installations include solar panels, solar water heaters, geothermal heat pumps, and battery storage technology. This credit is available for property placed in service between 2022 and 2032.
These credits are nonrefundable, meaning they can reduce a tax liability to zero but will not be paid out as a refund. The Energy Efficient Home Improvement Credit cannot be carried forward, but the Residential Clean Energy Credit can be. Starting in 2025, homeowners may need to report a product identification number for certain improvements to claim the credit.
Tax Implications of Selling Your Home
When selling a primary residence, a homeowner may be able to exclude profit from their income using the Home Sale Exclusion. Under this rule, a single filer can exclude up to $250,000 of capital gain, and married couples filing jointly can exclude up to $500,000.
To qualify for the exclusion, the homeowner must meet both ownership and use tests. The ownership test requires owning the home for at least two of the five years before the sale. The use test requires living in the home as a main residence for at least two of the five years before the sale. These two-year periods do not have to be continuous.
The capital gain on a home sale is the sale price minus the home’s adjusted basis. The adjusted basis is the original purchase price plus the cost of capital improvements, such as adding a room or renovating a kitchen. Keeping records of these improvements is necessary as they increase the basis and reduce the taxable gain.
Claiming Your Homeowner Tax Breaks
To benefit from deductions like mortgage interest and property taxes, a taxpayer must itemize deductions on Schedule A (Form 1040) instead of taking the standard deduction. A taxpayer should choose to itemize only if their total itemized deductions exceed the standard deduction amount for their filing status. For 2024, the standard deduction is $29,200 for married couples filing jointly and $14,600 for single filers.
Tax credits do not require itemizing and are claimed directly on the tax return. To claim the residential energy credits, a homeowner must file Form 5695, Residential Energy Credits. The results from this form are then transferred to the main Form 1040.
If a homeowner receives Form 1099-S, Proceeds From Real Estate Transactions, they must report the sale on their tax return even if the gain is excludable. The sale is reported on Form 8949 and then carried to Schedule D, Capital Gains and Losses. If no Form 1099-S is received and the gain is fully excludable, reporting the sale may not be necessary.