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For most Americans, buying a home is the biggest investment they will make. There are ways to make it less taxing. The Internal Revenue Service spells out the details in Publication 530, Tax Information for Homeowners, which it updates each year. Here are some key things to know about when it comes to taxes and owning or buying a home.
DEDUCTIONS
Mortgage interest deduction
Taxpayers who itemize deductions, instead of taking the standard deduction, can deduct mortgage interest paid for loans on their main home and a second home—up to a point.
You generally can deduct home mortgage interest only to the extent the loan proceeds from your mortgage are used to buy, build or substantially improve the home securing the loan.
The loan can be a first or second mortgage, a home-improvement loan, a home-equity loan or a refinanced mortgage.
- For mortgages originated on or before Dec. 15, 2017, interest on up to $1 million of debt is deductible ($500,000 if married filing separately).
- For mortgages originated after Dec. 15, 2017, interest on up to $750,000 of debt is deductible ($375,000 if married filing separately).
These rules are subject to change after 2025, depending on whether Congress extends the 2017 tax-law provisions on mortgage interest deductions.
IRS Publication 936, Home Mortgage Interest Deduction, has more details.
Deduction for state and local property taxes
Homeowners who itemize deductions can deduct state and local real-estate taxes, subject to an overall SALT cap.
The deduction for state and local taxes, including income, sales or real-estate taxes, is limited to $10,000 per return ($5,000 if married filing separately).
That cap, though, is controversial, and lawmakers are fighting over its fate. The so-called SALT cap is one of the temporary provisions of the 2017 tax law that is set to expire at the end of 2025. If it does, or the level of the cap is increased, more taxpayers, especially in states with high property-tax rates, may be able to itemize and get a larger deduction.
Home-office deduction
Self-employed individuals who use part of their home exclusively and regularly for business purposes can deduct expenses related to a home office. The catch is that you have to have self-employment income. You can’t take the deduction for working from home for a job where you receive a W-2 from an employer.
A simplified method allows taxpayers to use a rate of $5 a square foot of the portion of the home used for business, up to a maximum of 300 square feet, to compute the business use of home deduction.
IRS Publication 587, Business Use of Your Home, has details.
What you can’t deduct
While homeownership brings many possible deductions, there are a number of things you can’t use to reduce your taxes, according to the IRS. These include:
• Insurance, including title insurance
• Wages you pay for domestic help
• Depreciation
• The cost of utilities or home repairs
• Internet or Wi-Fi
• Homeowners or condominium association fees
CREDITS
Energy-efficient home improvement credit
Homeowners who make certain energy-efficient improvements to their homes can claim a tax credit of up to $3,200 a year.
This credit equals 30% of the cost of allowed improvements. Insulation, windows and doors can qualify. Heat pumps, water heaters and biomass stoves can count, too.
There are sublimits for different types of improvements: $600 for windows, $2,000 for a heat pump, for example.
Unlike tax deductions that lower income, a tax credit is typically a dollar-for-dollar reduction of tax.
Certain efficiency standards must be met to qualify. For more information, see the IRS Energy Efficient Home Improvement Credit information page.
These credits were expanded under the Inflation Reduction Act of 2022. There is the possibility that some or all of them might come under fire in the new Trump administration.
Solar, wind and geothermal credit
Homeowners who add solar-, wind- or geothermal-power generation, solar water heaters or battery storage to their homes can claim residential clean-energy credits.
The credit covers 30% of the cost of allowed improvements, with no annual or lifetime maximum.
The credit is nonrefundable, meaning the amount you receive can’t exceed the amount you owe in tax. You can carry forward any excess unused credit to future tax years.
For more information, see the IRS Residential Clean Energy Credit information page.
These credits may also be called into question in the new administration and as the new Congress takes up tax legislation.
SELLING A HOME
Home seller’s exclusion
If you sell your home when you are living and it has gone up in value since you bought it, you will potentially owe capital-gains taxes on the gain.
The gain is the difference between the selling price and the adjusted basis—what you paid for the house, plus any renovations or other capital improvements and certain selling expenses. IRS Publication 523, Selling Your Home, has examples of improvements that count, such as new siding, a patio or ductwork.
The home-sale exclusion lets homeowners skip taxes on a large chunk of profit when they sell their homes.
• Single filers can exclude up to $250,000 of capital gains.
• Married couples filing jointly can exclude up to $500,000 of capital gains.
To be eligible, the homeowner typically must have used the house as a primary residence for at least two of the previous five years.
Leaving your home to heirs
Keeping your home until death is one of the ultimate tax breaks.
When an owner dies and leaves a property to heirs, the capital gains can effectively get reset to zero. This is called a step-up in basis. It means the heir would owe capital-gains taxes only on the home’s growth in value over the fair-market price at the time of the owner’s death.
