Owning or purchasing a home comes with both challenges and benefits. One significant advantage is the various tax breaks available to homeowners and buyers. These tax benefits can alleviate financial strain and help you save money. Let’s dive into the essential tax deductions, credits, and provisions homeowners and buyers should know about.
Tax Breaks for Homeowners
1. Mortgage Interest Deduction
One of the biggest advantages of owning a home is the chance to save on taxes through the mortgage interest deduction. Homeowners who itemize their deductions can deduct the interest paid on mortgages of up to $750,000 ($375,000 for married couples filing separately). This applies to primary residences or one qualifying secondary home.
Take note:
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Loans originating before December 16, 2017, may qualify for a higher limit of $1 million.
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Your lender typically provides Form 1098 detailing the amount of interest paid, which is used for Schedule A (Form 1040).
2. Mortgage Interest Credit
If you have a lower income and were issued a Mortgage Credit Certificate (MCC) by a state or local government to help subsidize your home purchase, you may be eligible for the mortgage interest credit. This credit ranges from 10% to 50% of the mortgage interest paid, subject to a $2,000 cap (if above the 20% threshold).
Keep in mind:
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This credit reduces your mortgage interest deduction, so you cannot benefit from both fully.
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Claim the credit using Form 8396 along with your 1040 filing.
3. Property Tax Deduction
Homeowners who itemize deductions can also deduct property taxes paid on their homes. The limit for combined state and local taxes, which includes property taxes, is capped at $10,000 ($5,000 for married taxpayers filing separately).
4. Home Renovations and Medical Expense Deductions
If you make medically necessary improvements to your home—such as adding a wheelchair ramp or installing handrails—you may be able to deduct the portion of those expenses that exceeds 7.5% of your adjusted gross income (AGI).
5. Energy-Saving Tax Credits
To incentivize eco-friendly upgrades, the IRS offers tax credits to homeowners making energy-efficient improvements. Starting in 2023, taxpayers may claim a credit of 30% of qualifying installation costs, up to $1,200 annually, for improvements like doors, windows, and insulation. Heat pumps and energy-efficient biomass stoves may qualify for credits up to $2,000 annually.
For even bigger savings, consider:
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Adding solar panels: These offer a distinct federal energy tax credit.
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Ensure the equipment is from a qualified manufacturer and meets IRS requirements.
6. Electric Vehicle (EV) Charger Tax Credit
If you’ve installed an electric vehicle charger in your home, you may be eligible for a credit of 30% of the installation costs, up to $1,000. The credit applies to bidirectional charging equipment as well.
Claim this credit using Form 8911 when you file taxes.
Tax Breaks for Homebuyers
7. First-Time Homebuyer IRA Withdrawals
First-time buyers can withdraw up to $10,000 from a retirement account like an IRA without paying the 10% early withdrawal penalty. The account must have been in existence for at least five years, and the funds must be used for buying or building a home.
Key points:
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Couples can withdraw a combined $20,000 penalty-free.
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Traditional IRA withdrawals will still incur income taxes.
8. 401(k) Loans for Homebuyers
A 401(k) loan is another option for funding your home purchase. Borrowers can typically take out a loan equal to 50% of their balance, up to $50,000, to apply as a down payment.
Keep in mind:
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Loans must usually be paid back within five years, though main-home purchases may allow for longer repayment terms.
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Failing to repay the borrowed funds could result in taxes and penalties.
Real Estate Tax Breaks
9. Capital Gains Tax Exclusion
When you sell your home, you may be able to exclude $250,000 of the gain ($500,000 for married joint filers), provided you have lived in the home for at least two of the past five years. This exclusion can help significantly reduce your taxable gains from selling your property.
If you do not meet all conditions, partial exclusions may still apply for health, job location changes, or other unforeseen circumstances.
10. Increased Basis on Home Sale
The basis of your home—the amount used to calculate your capital gain from a sale—can be adjusted to include certain costs. Expenses like legal fees, improvements, or renovations can increase the basis and lower your taxable capital gain.
11. Forgiveness of Mortgage Debt
Under certain conditions, when part of a mortgage is forgiven through a foreclosure or short sale, the forgiven debt may not be taxed as income. The tax-free forgiveness limit is $750,000 ($375,000 for separately filing spouses), so check your lender arrangements.
Federal Tax Credits for Homeowners
In addition to standard tax breaks, federal tax incentives can help homeowners reduce costs. These include programs encouraging environmentally friendly upgrades, such as:
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Solar panel installation tax credits.
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EV incentives.
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Additional energy efficiency credits.
Use Form 5695 to claim applicable federal incentives.
Maximizing Your Homeowner Tax Benefits
To make the most of available tax breaks:
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Keep detailed records of all home-related expenses.
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Stay updated on IRS tax code changes.
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Consult a tax professional to explore specific tax-saving opportunities tailored to your situation.
Becoming a homeowner or first-time buyer comes with challenges, but the substantial tax advantages can ease some of the burdens. Take advantage of deductions and credits available at your federal and state levels to maximize savings and make homeownership more affordable for you.