What Are the Tax Benefits of Buying a House?

Homeownership is a financial milestone, and the U.S. tax code offers several provisions to help offset its costs. These benefits require understanding specific rules and qualifications set by the Internal Revenue Service (IRS). This guide outlines the various deductions, credits, and exclusions available to homeowners, which can influence financial planning.

Deductions for Ongoing Homeownership

The mortgage interest deduction allows homeowners to deduct the interest paid on their home loan, which can lower their taxable income. The deduction is limited to interest on up to $750,000 of mortgage debt for those married filing jointly, or $375,000 for married individuals filing separately. This debt must be for a loan used to buy, build, or substantially improve a primary or secondary residence. Interest paid on a home equity loan or a home equity line of credit (HELOC) is also deductible, but only if the funds are used to buy, build, or substantially improve the home that secures the loan.

Homeowners can also deduct state and local taxes (SALT), including property taxes. A household can deduct a maximum of $10,000 per year for all state and local taxes combined, which includes property taxes plus either state income or sales taxes. For married couples filing separately, this limit is $5,000.

Another potential deduction relates to mortgage points, also known as discount points. These are fees paid directly to the lender at closing in exchange for a reduced interest rate. If the points are paid on a loan to purchase or build a primary residence, they are typically 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 new loan.

Tax Credits and Specialized Deductions

The tax code also offers credits and specialized deductions for homeowners. A Mortgage Credit Certificate (MCC), issued by state or local governments, provides a direct tax credit for a portion of the mortgage interest paid each year. MCCs are targeted toward lower-income homebuyers, and unlike a deduction, a credit reduces the final tax bill dollar-for-dollar.

Federal tax credits are available for making certain energy-efficient improvements to a home. These credits, such as the Energy Efficient Home Improvement Credit, can help offset the cost of installing new windows, doors, or high-efficiency heating and cooling equipment. Each type of improvement has specific efficiency standards that must be met, and there are annual limits on the total credit amount a taxpayer can claim.

For self-employed individuals, the home office deduction is available if a portion of the home is used exclusively and regularly as the principal place of business. The IRS provides two methods for calculating this deduction: the simplified method, based on square footage, and the actual expense method, which uses the actual costs associated with the home office.

In certain circumstances, the cost of medically necessary home improvements may be deductible as a medical expense. The primary purpose of the expense must be for the medical care of the taxpayer, their spouse, or a dependent. These expenses are only deductible to the extent that they exceed any increase in the home’s value. The total medical expense deduction can only be claimed for expenses that exceed 7.5% of the taxpayer’s adjusted gross income (AGI).

Tax Benefits When Selling Your Home

When selling a home, the home sale exclusion allows taxpayers to exclude a large portion of the capital gain from their income. A capital gain is the difference between the home’s selling price and its adjusted basis, which is the original purchase price plus the cost of capital improvements.

The exclusion amount is up to $250,000 for a single filer and up to $500,000 for a married couple filing a joint return. To qualify for the full exclusion, the seller must meet both an ownership test and a use test within the five-year period leading up to the sale date. The ownership test requires owning the home for at least two years, while the use test requires living in it as a primary residence for at least two years. These two-year periods do not need to be continuous.

If a seller does not meet the ownership and use tests, they may qualify for a partial exclusion. A partial exclusion is available if the primary reason for the sale is a change in place of employment, a health-related issue, or certain other unforeseen circumstances as defined by the IRS. The amount of the partial exclusion is prorated based on the portion of the two-year requirement that was met.

How to Claim Homeownership Tax Benefits

To take advantage of deductions for mortgage interest and property taxes, a taxpayer must itemize deductions on Schedule A of Form 1040. This choice is only beneficial if the total of a taxpayer’s itemized deductions exceeds the standard deduction amount for their filing status. The Tax Cuts and Jobs Act increased the standard deduction, which means fewer taxpayers now find it advantageous to itemize.

For example, if a married couple’s combined mortgage interest and SALT deductions total $18,000, they would likely not itemize if the 2025 standard deduction for their filing status is $30,000. They would receive a larger tax benefit by taking the standard deduction.

Claiming any home-related tax benefit requires proper documentation. Homeowners receive Form 1098, Mortgage Interest Statement, from their lender each year, which reports the amount of mortgage interest and any points paid. This information is used to complete Schedule A.

Maintaining thorough records is also important. This includes keeping purchase and sale documents, receipts for all capital improvements, and proof of property tax payments. These records are necessary for accurately filing tax returns and are indispensable for calculating the home’s adjusted basis when it is eventually sold.