There are many benefits to owning a home, including the stability, security, and sense of place it gives individuals and families. Of course, beyond these intangible benefits are the tangible financial advantages homeowners can realize on an annual basis and over time. As tax season approaches, here is a rundown of the main tax benefits of homeownership. Talk with your tax advisor to make sure you’re taking full advantage of these allowances.
1. Mortgage Interest
Homeowners who itemize their tax deductions on their federal income tax return can typically deduct the mortgage interest they pay on loans for their primary residence and, in many cases, on a second home. This can amount to significant savings, especially in the early years of a mortgage, when a larger portion of the monthly payment goes toward interest vs. principal. The mortgage interest deduction is also available on second mortgages such as home equity loans (HELOANs) and home equity lines of credit (HELOCs), creating an incentive for people to maintain and improve their homes. Deductions are limited by the total amount borrowed, which varies for joint and separate filers, and the funds must have been used to buy, build, or substantially improve the home.
2. Property Taxes
Property taxes paid on a primary residence and/or second home can also be deducted if you itemize. However, it is important to note that state and local tax (SALT) deductions, which include property taxes, are capped at $10,000.
3. Home Office Expenses
Small business owners and self-employed individuals who use a portion of their home for business purposes may be able to deduct certain expenses such as mortgage interest, property taxes, utilities, insurance, and repairs. The deduction will only apply to the portion of the home dedicated to the business – for example a home office – and that area must be used exclusively and regularly for work. Additionally, tax deductible expenses can’t exceed the income from the business for which the deductions have been taken. Because there are different methods used to calculate the portion of home expenses that are eligible for deduction, it is best to consult a tax professional.
4. Energy-Efficient Upgrades
Due to the Inflation Reduction Act of 2022, there has never been a better time to make energy-efficient upgrades to a home. Homeowners can claim a tax credit for purchases that make the home more energy efficient, such as insulation upgrades, exterior windows and doors, HVAC equipment, or a metal roof. Through 2022, the credit is still subject to a $500 lifetime limit, but beginning in 2023 the $500 limit is lifted, and the credit will be worth 30% of the homeowner’s annual investment. Expenditures for solar, wind, geothermal, and fuel-cell technology upgrades, as well as battery storage technology will qualify for expanded tax credits in 2023.
5. Moving Expenses
If you moved more than 50 miles for a new job or business, you may be able to deduct certain moving expenses. These include the cost of moving your belongings and temporary lodging while you were looking for a permanent residence.
6. Capital Gains Exclusion
If you sold your home for profit, you can exclude up to $250,000 of the gain ($500,000 for married couples filing jointly) from your taxable income. This benefit is available if you owned and lived in the home for at least two of the last five years prior to the sale. You can only claim the exclusion once every two years, and other limitations may apply for rental property and vacation homes.
Overall, owning a home can provide several benefits that reduce your tax liability, saving you money. It’s always a good idea to consult with a tax professional to determine which deductions and credits you may be eligible for.