Common Tax Deductions for Homeowners

By Arlene Isenburg on April, 7 2022
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Arlene Isenburg

It’s that time of year again… TAX SEASON! Let’s be honest, no one likes doing taxes except accountants. We all want to keep as much of our money as possible. The good news is if you’re a new homeowner, you may be entitled to an extra tax break just for owning your home.

A tax deduction is subtracted from your income and lowers the amount of taxes you need to pay. Taxpayers can choose the standard fixed deduction available to all tax-payers, or they can choose itemized deductions. The standard deduction for 2021 is $12,550 for single people and married couples filing taxes individually. It is $25,100 for married couples filing together. And it is $18,800 for heads of households.

Whereas itemized deductions (which can include tax breaks specific to owning a home) are unique to you. So you will want to do the math and compare the standard deduction with all your itemized deductions to see which option would save you more. From year to year, the IRS changes what and how much you can deduct, so let’s explore the itemized tax breaks available to homeowners for this past year.

Homeowner Tax Deductions 2021

Property Taxes

When you own a home, as opposed to renting, you will need to pay state and local property taxes. Luckily, there is a property tax deduction of up to $5,000 for single people/couples filing separately and up to $10,000 for married couples filing jointly. This can obviously be a big savings for you. You can deduct the taxes you paid on your primary residence, land, vacation home, and boats/vehicles. But you will not be able to deduct the taxes you paid on rental/commercial properties and properties you don’t own, taxes you have yet to pay, or transfer taxes paid upon the sale of your house.

Mortgage Interest

This is the largest deduction for most homeowners. Though you cannot deduct your mortgage, you can deduct the interest on the mortgage, which you pay every month in addition to the principal. For 2021, you can deduct up to $750,000 as a single person/married couple filing jointly and $375,000 per person for married couples filing separately. This is down from the $1 million deduction that used to be allowed.

Mortgage Insurance

If you make a down payment of less than 20%, you will likely need to pay for Private Mortgage Insurance (PMI) until you accrue 20% equity in the home. PMI and all mortgage insurance exist to protect your lender in case you default on your loan. Luckily, mortgage insurance is tax deductible, because the IRS treats mortgage insurance the same way it treats mortgage interest. But it’s not just insurance for conventional loans that is deductible. You can also deduct insurance for FHA loans, as well as the funding fee and the guarantee fee for VA loans and USDA homes, respectively.

Necessary Home Improvements

Surprising to many, renovating or improving your home is not tax deductible. That is, unless the home improvement is for a reason that is considered necessary, like building ramps or widening doorways to make your home wheelchair accessible if someone in your household is wheelchair-bound. Whereas renovating a bathroom or building an addition to increase the value of your home is not deductible.

Home Office Expenses

One thing the pandemic has changed (perhaps permanently) is how and where we all work. For so many working people, going into an office is no longer necessary when they can work just as well out of a home office. In addition to the convenience, lack of a commute, and savings on renting office space, you may also be able to deduct the expenses required to build/maintain your home office. The deduction is based on the amount of your home that is used for your job. But there are some requirements to qualify, such as regular use of your home office, exclusive use of the office for your business, and being self-employed. For this deduction, you can calculate your actual expenses or use the simplified method provided by the IRS, which is approximately $5 a square foot, maxing out at 300 square feet and a $1,500 deduction.

Capital Gains

A person’s home is often their greatest financial asset, as it usually appreciates and gains value as time goes on, which is not always the case with assets. As such, it is subject to capital gains tax on the profit you make when you sell your home. The capital gain is the difference between your home’s value when you purchase it and when you sell it. If your home gains value, it’s possible you will need to pay taxes on the profit. Fortunately, due to the Taxpayer Relief Act of 1997, many homeowners are exempt from this tax. For single tax filers and married couples who file separately, you will not have to pay any tax on the first $250,000 of profit. For married couples filing jointly, you will not have to pay tax on the first $500,000. But you will be responsible for paying tax on any profits over these limits, and the exemption is only allowed once every 2 years.

Interest on Home Equity Loan/Home Equity Line of Credit (HELOC)

A home equity loan and HELOCs let you use your home equity to get needed cash. A Home Equity Loan is very similar to a mortgage, which is why it’s actually called a second mortgage. The lender gives you a lump-sum which you pay off in monthly installments. A HELOC is like a credit or debit card, enabling you to withdraw up to a certain credit limit as needed. Both options use your home as collateral. And both options allow you to deduct the interest paid on your loan, just like you can for the interest on your mortgage. But beware… Since 2017’s Tax Cuts and Jobs Act, you can only qualify for the deduction if the loan is used for qualified purposes, such as improving your home through a renovation.

Mortgage Discount Points

Sometimes an option given to borrowers, mortgage points are fees you pay to reduce your loan’s interest rate. This is also called “buying down the rate.” Generally, one discount point equals 1% of the mortgage amount. Mortgage points are tax-deductible because they lower your interest rate. They differ from loan origination points, which can’t be deducted because they don’t impact your interest rate. When shopping for a mortgage, make sure the interest rate given to you does not include mortgage points, as it can be very misleading.

Non Tax-Deductible Expenses for Homeowners

While there are numerous home ownership expenses that can be deducted from your taxes, there are also many that can’t. As previously mentioned, you can deduct property taxes, but there are no tax deductions for home improvements unless they are considered necessary. In addition, you cannot deduct transfer taxes, taxes you have not yet paid, taxes on properties you do not own, or taxes on rental and/or commercial properties. Other expenses that are not deductible are your mortgage principal; your down payment; services/utilities like trash collection and gas; domestic employees like housekeepers; HOA fees; loans for energy-saving home upgrades; fire insurance; and homeowner’s insurance.

The Bottom Line

With the unexpected nature of life, saving money is always a good thing. And the tax code provides homeowners deductions on many of their home expenses. Compare your itemized deductions to the IRS’ standardized deduction to see which option will allow you to keep more of your money. And if you have any questions, it’s always smart to talk to a tax professional.