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Don’t Miss These Top 5 Tax Breaks for Homeowners

When you own your own home, you want to make sure you take every deduction possible to maximize your tax refund. Many people view these refunds as “found money,” but they’re really not. It’s money that you’re entitled to receive back…as long as you claim the proper deductions.

Owning a home is often considered a cornerstone of the American dream. Beyond the pride and security of homeownership, there are also financial perks that come with it, particularly when it comes to tax benefits. Understanding these tax advantages can mean significant savings and a more efficient financial strategy for many homeowners.

tax breaks for homeowners

In this blog, we’ll explore how being a homeowner can provide certain tax benefits, from deducting mortgage interest to leveraging home improvement expenses. By the end, you’ll understand how homeownership can positively impact your tax situation and overall financial well-being.

Being a homeowner—especially one with a mortgage or one who has recently carried out major renovations—can certainly thicken that refund when you’re knowledgeable about what counts as a deduction. With that said, it’s only natural to wonder how these improvements, mortgage interest, taxable income, and itemized deductions might impact your tax return and potential tax refund.

We’re completely aware that taxes can get complicated, but that’s why we’re here to help! 

Here are some of the most important tax deductions that homeowners can take advantage of.

1. Mortgage Interest Deduction

Here’s one of the main tax benefits of becoming a homeowner: After buying a home, you can claim the interest you’ve paid on your mortgage for the past year, which is tax-deductible (if it meets a few criteria).

If your mortgage fits into any of these three categories, then you can deduct the interest on it:

  • You took out a mortgage on or before Oct. 13, 1987 (called grandfathered debt).
  • You (or your spouse if married filing a joint return) took out a mortgage after Oct. 13, 1987, but before Dec. 16, 2017, to buy, build, or significantly improve your home (aka home acquisition debt), and these mortgages—plus any grandfathered debt—totaled $1 million or less ($500,000 or less if married filing separately).
  • You (or your spouse if married filing a joint return) took out a mortgage after Dec. 15, 2017, to buy, build, or substantially improve your home, and that mortgage—plus any grandfathered debt—totaled $750,000 or less ($375,000 or less if married filing separately).

Your loan servicer will send you a tax form (IRS Form 1098) well before the tax filing deadline summarizing how much you paid toward your mortgage’s principal versus the interest portion of your mortgage payments. 

2. Points

If you purchased points for a new mortgage, to refinance an existing mortgage, or paid on loans secured by your second home, these points can be deducted over the term of the loan. If you paid upfront for this rate reduction, you can deduct the points that same year (the year you paid for them). 

Like mortgage interest, discount point deductions are limited for homes costing more than $750,000. This limit jumps to $1 million for mortgages originated before Dec. 16, 2017.

A few more rules on the tax benefits of mortgage points: 

  • The points can’t be used to finance standalone fees, such as property taxes. And you must have had the funds to purchase the points. These funds can’t be a gift and can’t come from a loan. The amount you paid for points must be itemized as points on your statement. 
  • You can deduct all your points at once during the tax year when you purchased your home, or you can write off a percentage of your points each year you have your mortgage. 
  • Points that you purchased for refinancing a mortgage can also be tax-deductible, but only over the life of the loan, not all at once. Homeowners who refinance can write off the balance of the old points and begin to amortize the new points. Loan origination points are not deductible.* 

3. Home Improvement Loan Interest 

It used to be that if you took out a loan to do some major home improvements, you could deduct the interest paid on that loan. That tax break is no longer available, but many people still wrongly assume this interest will be tax-deductible.

However, you can still get a tax benefit from two types of home improvements: home renovations that are considered medical expenses and solar energy installations.

On the medical expenses front, tax-deductible expenses include items like wheelchair ramps, support bars for bathtubs or toilets, doorway modifications, stairway renovations, and warning systems. Essentially, any accessibility item that would make a home safe and inhabitable for someone with specific medical needs will qualify.

The money you pay to install solar energy systems isn’t tax-free, but these systems can save you money on your tax bill. If you make qualified energy-efficient improvements to your home, you may qualify for a tax credit of up to $3,200. You can claim the credit for improvements made through 2032.

As of Jan. 1, 2023, the credit equaled 30% of certain qualified expenses, including:

  • Qualified energy-efficiency improvements installed during the year
  • Residential energy property expenses
  • Home energy audits

There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenses. The credit is allowed for qualifying property placed in service on or after Jan. 1, 2023, and before Jan. 1, 2033.

The maximum credit you can claim each year:

  • $1,200 for energy property costs and certain energy-efficient home improvements, with caps on doors ($250 per door and $500 total), windows ($600), and home energy audits ($150)
  • $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers

The credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033. The credit is also nonrefundable, so you can’t get back more on the credit than you owe in taxes, and you can’t apply any excess credit to future tax years.

Use previous versions of Form 5695 for any improvements installed in 2022 or earlier.

4. Property Taxes

You can deduct up to $10,000 in property taxes paid each year ($5,000 if you’re married filing separately), which includes both state and local taxes. 

If you have a mortgage with an escrow account, the amount of real estate property taxes you paid will appear on your annual escrow statement. 

This doesn’t include transfer taxes on the sale of your home, HOA assessments, payments on loans that finance energy-efficient home improvements, public assessments, or property taxes you have yet to pay.* 

5. Home Equity Loan and Line of Credit Interest

Although you can’t deduct most home improvements, you can deduct home equity loan or home equity line of credit interest if you used home equity proceeds for renovations. 

For tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or significantly improve the residence, then the interest you pay on the borrowed funds is classified as home acquisition debt. This means it may be deductible and subject to certain dollar limitations. 

Here’s where it gets tricky, though. Interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible. However, for tax years before 2018 and after 2025, the interest you pay on the borrowed funds for home equity loans or lines of credit secured by your main home or second home may be deductible (subject to certain dollar limitations), regardless of how you use the loan proceeds. For example, if you use a home equity loan or a line of credit to pay personal living expenses, such as credit card debts, you may be able to deduct the interest paid.

There are a couple of other rules as well. The renovations must be made on the same home where you tapped the equity. For example, you can’t take out a home equity loan on your primary residence to renovate your vacation home and claim that as a deduction. You also can’t take out a home equity loan to create an emergency fund (or to use it for anything other than improving your home) and expect to claim it as a deduction.

Enjoy All the Tax Breaks for Homeowners

Taxes, like loan applications, require diligent recordkeeping and often a heap of paperwork. Thankfully, owning your own home can provide some major relief on the tax front, though you want to review the most recent rules surrounding tax deductions before you file. 

As the Tax Cuts and Jobs Act proves, certain laws and deductions change over time. Be sure you know about all the tax deductions you have coming your way while steering clear of old rules that could get you in trouble with the Internal Revenue Service.* 

Owning a home means more than just a place to call your own. It can come with great benefits like appreciation, the ability to customize your living space, and a break come tax season. From deducting mortgage interest to leveraging home improvement expenses, homeownership can have a big impact on your tax situation, which means it can have a big impact on your financial health. 

Maximize your savings and make the most out of your homeownership investment by taking advantage of these tax benefits and staying informed about relevant tax laws/regulations that apply to your situation.

APM Loan Advisors are not tax professionals, but they have access to information about what is typically considered an allowable tax deduction related to homeownership. Consulting with a tax professional or financial advisor can provide personalized advice that maximizes your tax strategy.

* The information provided has been prepared for informational purposes only and is not intended to provide—and should not be relied on for—tax, legal, or accounting advice. You should consult your tax, legal, and accounting professionals for information specific to you.

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