IRS Pub 530: Tax Information for Homeowners Explained

Owning a home comes with significant tax implications, and understanding them can help you maximize deductions and avoid costly mistakes. The IRS provides guidance through Publication 530, which outlines key tax benefits and responsibilities for homeowners.

This guide covers mortgage interest deductions, real estate taxes, and exclusions on gains when selling a home. Keeping accurate records ensures compliance and maximizes tax advantages.

Mortgage Interest Considerations

Mortgage interest is one of the largest tax-deductible expenses for homeowners. The IRS allows deductions on interest paid for a qualified home loan, but eligibility depends on specific rules. The Tax Cuts and Jobs Act (TCJA) of 2017 limited deductions to mortgage debt up to $750,000 for married couples filing jointly ($375,000 for single filers or married filing separately). Loans taken before December 16, 2017, may still qualify for the previous $1 million limit.

Interest on a primary or secondary home mortgage is generally deductible, but home equity loans and lines of credit (HELOCs) qualify only if the funds were used to buy, build, or substantially improve the home securing the loan. If the loan was used for personal expenses, such as paying off credit card debt, the interest is not deductible. When refinancing, rolling unsecured debt into a mortgage does not automatically make the interest deductible.

Refinancing also affects deductions. Interest remains deductible, but any additional funds borrowed beyond the original loan amount must be used for home improvements to qualify. Points paid on a refinance must be deducted over the life of the loan, unlike points on an original mortgage, which may be deductible in full in the year of purchase.

Real Estate Taxes

Property taxes are a significant cost of homeownership, and the IRS allows deductions for certain real estate taxes. To qualify, the tax must be based on the assessed value of the property and imposed uniformly for the general public benefit. Fees for services like trash collection or homeowners’ association dues do not count. Only state, local, and foreign real estate taxes qualify, and they must have been paid during the tax year to be deductible.

The state and local tax (SALT) cap limits the total deduction for state income, sales, and property taxes to $10,000 ($5,000 for married couples filing separately). This cap, introduced by the TCJA, remains in effect through 2025 unless Congress enacts changes. Homeowners in high-tax states often find their property tax deductions limited due to this cap.

Many homeowners pay property taxes through an escrow account managed by their mortgage lender. However, only the portion actually paid to the taxing authority in a given year is deductible, not the amount deposited into escrow. This can lead to timing differences, particularly if a homeowner refinances or sells their home mid-year, as property taxes are often prorated between the buyer and seller at closing.

Tax assessments for local improvements, such as sidewalk construction or sewer line installation, are not deductible because they directly increase a property’s value rather than serving the general public. However, these costs may be added to the home’s basis, potentially reducing taxable gains when the property is sold. Homeowners should review their tax bills to distinguish between deductible real estate taxes and non-deductible assessments.

Adjusted Basis for Your Home

The adjusted basis of a home determines the taxable gain when selling a property. A home’s basis starts with the original purchase price, which includes not just the amount paid for the property but also associated costs such as legal fees, recording fees, and title insurance. This initial figure, known as the cost basis, is then adjusted over time based on factors that either increase or decrease its value for tax purposes.

Improvements that add to a home’s value, extend its useful life, or adapt it to new uses increase the adjusted basis. These include major renovations such as adding a new roof, building an extension, upgrading electrical or plumbing systems, or installing central air conditioning. Routine maintenance, such as fixing a leaky faucet or repainting a room, does not increase basis. Keeping detailed records of all qualifying upgrades is important, as these costs can reduce taxable gains when selling the home.

Depreciation, casualty losses, and certain tax credits can reduce a home’s adjusted basis. If a portion of the property has been used for business or rental purposes, depreciation deductions must be subtracted from the basis. Similarly, if a homeowner receives an insurance payout for property damage and does not fully reinvest the proceeds into repairs, the difference lowers the basis. Certain government incentives, like energy-efficient home improvement tax credits, may also require adjustments to prevent double-dipping on tax benefits.

Points and Certain Closing Costs

When purchasing a home, buyers often encounter various fees and charges at closing, some of which may have tax implications. Points, also called loan origination fees or discount points, can either reduce the mortgage interest rate or serve as a fee to the lender. The IRS allows points to be deductible in the year paid if they meet specific qualifications, such as being calculated as a percentage of the loan amount and not covering separate services like appraisal or title fees. The deduction is only available if the payment of points is an established practice in the area and the amount paid is within the typical range for that location.

Certain closing costs, including title searches, home inspections, and attorney fees, are generally not deductible but can still affect the long-term financial picture. While these costs do not lower taxable income in the year of purchase, they may become relevant when determining capital gains upon selling the property. Homeowners should retain detailed records of all closing costs, as some may contribute to the property’s basis, reducing potential taxable gains in the future.

Exclusions on Gains from Home Sales

Selling a home can result in a taxable gain, but the IRS provides an exclusion that allows many homeowners to avoid paying capital gains tax on a portion of their profit. Individuals can exclude up to $250,000 of gain from the sale of a primary residence, while married couples filing jointly can exclude up to $500,000. To qualify, the homeowner must have owned and lived in the home as their primary residence for at least two of the five years preceding the sale. These two years do not need to be consecutive, which can benefit those who have moved in and out of the home during that period.

Certain situations allow for a partial exclusion if the homeowner does not meet the full residency requirement. If the sale is due to unforeseen circumstances such as job relocation, health issues, or other qualifying hardships, the exclusion may be prorated based on the time lived in the home. Additionally, homeowners who have claimed depreciation deductions for business or rental use of the property must recapture that portion of the gain as taxable income, even if they qualify for the exclusion. Keeping detailed records of home improvements and any periods of non-primary use can help ensure accurate reporting and maximize tax benefits when selling.

Recordkeeping Essentials

Maintaining thorough records is necessary for homeowners to substantiate deductions, track their home’s adjusted basis, and properly report any gains upon sale. The IRS recommends keeping documents related to the purchase, improvement, and sale of a home for as long as the property is owned, plus at least three years after filing the tax return for the year of sale. This includes the closing statement, purchase contract, receipts for major renovations, and records of any casualty losses or depreciation claimed.

Electronic storage of records can simplify organization and retrieval, especially for long-term homeowners who accumulate decades of documentation. Taxpayers who have refinanced, taken out home equity loans, or used part of their home for business purposes should maintain additional records to support deductions and basis adjustments. Proper recordkeeping ensures compliance with IRS requirements and helps homeowners maximize tax savings while avoiding disputes in the event of an audit.