As a homeowner, there are many tax breaks you may be eligible for, including deductions for mortgage interest and property taxes, credits for energy-efficient home improvements, and more. This article covers the credits and deductions that can help you make the most of your tax situation.
Understanding homeownership tax breaks
If you are new to homeownership, there are certain tax deductions and credits that you may qualify for now that you did not qualify for or consider previously. It is helpful to know which ones you can claim, whether you itemize or not.
Deductions you can ONLY claim when itemizing:
- Interest paid on your mortgage
- Property taxes paid to state and local governments
- Medically necessary home improvements
Deductions you can claim whether you itemize or not:
- Home office expenses
- Energy efficient credits
- Capital gains tax exemption
Mortgage Interest Deduction
The Mortgage Interest Deduction allows you to reduce your taxable income by the interest you pay on the loan you take out to buy your home. You can deduct interest on mortgages up to $750,000.
When you take out a home equity line of credit (HELOC), the IRS treats it as home acquisition debt, like a mortgage. This means you can deduct the interest paid on the line of credit.
For tax years 2018 through 2025, you can only claim interest if you used the credit to substantially improve the residence. For example, replacing your HVAC, installing a new roof, or remodeling the kitchen are qualified uses of a HELOC for the interest deduction.
State and Local Property Tax Deduction
If you itemize your deductions, you can deduct any property tax you paid when you purchased your home. Depending on your situation, you may have had to reimburse the seller of your home for property taxes they prepaid. That amount is deductible and can be found on your settlement documents.
You pay property taxes annually, so you have the option to deduct them every year. It’s important to note that the total amount you can write off for all state and local income, property, and sales tax combined is capped at $10,000. Depending on which is more beneficial, you may deduct more property tax and less state income tax, or vice-versa. Either way, the total amount you deduct cannot exceed $10,000 per return. The limit is the same if you are married. If you are filing separately, you and your spouse may deduct $5,000 each for a total of $10,000.
Home Office Deduction
If you are self-employed, filing a 1099, or a statutory employee, you may be eligible to deduct your home office expenses. You can claim these expenses whether you itemize or take the standard deduction. If you have a dedicated home office space you consistently and exclusively use to work, the associated costs could be deductible. There are two ways to calculate your home office expenses: the regular method and the simplified method.
The regular method involves calculating the percentage of your home’s total square footage that’s used as a home office. Then, you apply that percentage to the total cost of qualifying expenses like utilities, insurance, and mortgage interest. Although this method takes more time and documentation, it more accurately measures your home office expenses. Remember to include costs such as office supplies, furniture, and equipment, as these are fully deductible.
The simplified method gives you another option for figuring out your home office deduction without calculating the exact cost. Using this method, you can claim $5 per square foot of home office space up to 300 square feet. This means the deduction will max out at $1,500. Understanding can help you get the most out of this write-off. 
Energy efficient credits
Making your home more energy-efficient has benefits beyond just reducing your carbon footprint and cutting utility costs: it can also lead to significant tax savings.
The Residential Clean Energy Credit includes new installations and upgrades to renewable energy systems, such as solar panels and geothermal heat pumps.
The Energy Efficient Home Improvement Credit allows you to claim 30% of expenses for qualified upgrades like windows, doors, and insulation up to $1,200 each year.
Capital gains tax exemption
If you decide to sell your home, any profit you make is considered a capital gain. You must pay capital gains tax on the sale of a home, but the IRS offers a hefty tax break that could allow you to avoid paying taxes on a large part or all those profits.
The Section 121 exclusion allows you to deduct the first $250,000 in capital gains if you’re a single filer. If your filing status is married filing joint, you can deduct up to $500,000.
To qualify, the house must have been your primary residence for at least two of the past five years before selling. The two years don’t have to be consecutive. You can add up time within the five-year period to meet the requirements.
Medically necessary home improvements
If you make repairs or improvements that make your home more accessible, you can itemize them as medical expenses. However, they must be considered necessary for accessibility and safety for you, a spouse, or dependents with health conditions or disabilities.
For tax purposes, there is a difference between repairs and improvements. While repairs fix existing issues, improvements are intended to increase the property’s value or adapt it to medical needs. According to IRS guidelines, medically necessary home improvements may be tax-deductible if they meet specific criteria, such as being recommended by a licensed medical professional to alleviate a health condition or accommodate a disability. You may deduct items like adding ramps, widening doors, and installing rails and support bars. The IRS provides more examples of medically necessary improvements that could be deductible in Publication 502.
Homeownership costs that are not tax deductible
You might be surprised to learn that these common expenses aren’t deductible:
- Routine maintenance and repairs such as fixing leaks, painting, and lawn care
- Personal expenses like utilities, groceries, and furnishings
- Homeowner’s insurance premiums
- Mortgage payments
- HOA fees
Generally, the deductibility of expenses depends on its necessity and its purpose. While aesthetic home improvements may increase your property’s value, they are generally not deductible.
Note: As of 2018, you can no longer deduct foreign real estate taxes or moving expenses, except for military personnel moving on orders.
How to claim homeowner tax breaks using TaxSlayer
TaxSlayer makes it easy to claim the homeowner tax deductions and credits you deserve. We offer all the forms you need to claim these tax breaks and our user-friendly platform provides step-by-step guidance when completing your return. You can find more information about these homeowner tax breaks in our knowledgebase.
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