By Grant Edrington – Updated June 5, 2023

Note: Divvy is not a tax advisor, and the info in this blog post should not be considered tax advice. We always recommend consulting with a licensed tax professional for tax specifics for an individual or household.

In addition to the financial stability and potential home value appreciation that come with owning a home, homeowners also get the benefit of deductions and credits when tax season comes around each year. Oftentimes, these tax breaks can be the difference between getting a refund and having to send the government another check.

Let’s take a look at what kinds of tax deductions and credits are commonly available to homeowners.

How Homeowner Tax Breaks Work

Before getting into specific tax break examples, it’s important to understand the difference between deductions and credits, and standard and itemized deductions.

Tax Deductions vs. Tax Credits

While both tax deductions and tax credits reduce how much you pay in total taxes, they work a bit differently. Here are the main differences:

Tax Deduction: Tax deductions lower your taxable income for the year by the percentage of your highest tax bracket rate. Common tax deductions include charitable donations, home office expenses, and student loan interest in addition to homeowner deductions such as interest and property taxes. 

• Example: If you’re in the 24% tax bracket, a $1,000 deduction would save you $240. 

Tax Credit: Tax credits are often more attractive than tax deductions since they reduce how much you pay in taxes, dollar for dollar. Some tax credits include child and dependent care, premium tax credit (purchasing healthcare through the federal marketplace), and a saver’s credit (contributing to a tax-advantaged retirement account). 

Standard vs. Itemized Tax Deductions

If you’ve filed taxes before, you’ve chosen between taking the standard and itemized deduction. The standard deduction is a fixed amount that you deduct based on your filing status. Itemized deductions, on the other hand, are deductions that you select and total yourself. While going the itemized route could take more time – you need to have accurate deduction amounts and proof to back it up – it can often lead to a greater overall tax deduction. 

For homeowners, selecting the itemized deduction could be the best option, as they’re eligible for a couple of sizable deductions that we’ll get into next. Overall, if your itemized deductions end up being greater than your standard deduction amount, it’s best to do the itemized option.

Types of Tax Deductions

Mortgage Interest Deduction

If you have a mortgage on your home, mortgage interest is one of the best deductions to take advantage of. While interest can make up a big chunk of your monthly payment, it can also pay off big time when you file your taxes. 

Keep in mind that there’s a deduction limit of $750,000 whether you’re a single filer or filing as a married couple. 

Mortgage Insurance Deduction

If you have an FHA loan or purchased your home with a low or zero down payment, you might be paying mortgage insurance as part of your monthly payment. While the better option is to eliminate your mortgage insurance altogether, you can still deduct these payments along with your mortgage interest.

Mortgage Point Deduction

One mortgage point is equal to one percent of your home loan. Homeowners with a mortgage sometimes have the option to purchase points to lower their interest rate, which can have an impact on their future monthly mortgage payments. For example, if you have a 5% interest rate on a $300,000 mortgage, you can purchase one point for $3,000.

There are two types of points – origination points and deduction points – but you can only deduct the cost of deduction points for your taxes. Origination points or fees cover the mortgage company’s loan processing costs, whereas deduction points are those that give you an opportunity to lower your interest rate. 

Property Tax Deduction

In addition to mortgage-related deductions, homeowners can also deduct their property tax payments. Depending on your home value and local property tax rate, this can be a sizable reduction in your taxable income.

If you’re a single filer or filing as a married couple, you can deduct up to $10,000 in property taxes. If you’re a married couple but filing separately, you can each deduct up to $5,000.

Home Improvements

Improving and fixing up your home can also lead to tax breaks when it’s time to file, although these have a larger impact on the taxes you would pay on the gains from a sale. Home improvements that add value to the home, extend its life, and adapt it to new use could be used to increase the cost basis of your home when it’s time to sell. This could reduce the amount of gains you’re eventually taxed on as a seller. 

Keep in mind that more basic repairs such as fixing a window or gutters wouldn’t qualify for an adjusted cost basis for the home. Larger repairs such as a new AC system or roof could qualify, though.

Capital Gains Exclusion

When you sell an asset, such as a home, for more than you bought it for, it’s considered a capital gain. If your home has appreciated in value by the time you sell it, you may be able to avoid paying taxes on the capital gain thanks to the Taxpayer Relief Act of 1997. As long as you’ve owned the home and used it as a primary residence for at least two of the last five years, you can be exempt from capital gains taxes on the first $250,000 (if you’re single) and $500,000 (if you’re married and filing taxes jointly). Just keep in mind that you can only take advantage of this tax break once every two years. 

While the capital gains exclusion may not apply if you’re selling a home as an investment property, you may be able to take advantage of a 1031 exchange. This lets you defer capital gains taxes on the sale as long as you use the sale proceeds to purchase another property for the same purpose. Learn more about how 1031 exchanges work from the IRS here. 

Home Office Deduction

If you’re self-employed and use part of your home exclusively to run your business, you may be eligible to deduct some expenses for the part of your home that you use for work. However, simply working from home isn’t enough to qualify for this deduction – your home must be the principal location of your business and where you conduct work or meet with customers. The IRS refers to this as “exclusive use”. 

If you meet this requirement, you have a couple of options to calculate your deduction amount:

• Simplified option: You can deduct $5 per square foot depending on the amount of space at your home dedicated to business use. There is a maximum of 300 square feet, or $1,500. 
• Regular option: This option lets you deduct all direct office expenses such as a desk or painting in addition to a percentage of your overall housing expenses such as mortgage maintenance, repairs, utilities, and more based on the percentage of your home used for business. 

Types of Tax Credits

Mortgage Credit Certificate

In addition to mortgage interest and point deductions, the mortgage tax certificate is also available to some homeowners. This tax benefit gives back a percentage of your mortgage interest as a tax credit, which is a reduction of your actual owed taxes as opposed to a reduction of your taxable income. There is a maximum of $2,000 that you can receive as a credit. To qualify for this credit, you must:

• Be a first-time homebuyer
• Not earn more than the median income in your state (states have varying limits for income and sale price)
• Use the home as your primary residence
• Complete some form of pre-purchase homebuyer counseling or education (depending on your state)

An extra plus of the mortgage credit certificate is that you can have access to it each year as long as you continue to meet the eligibility requirements. 

Energy Efficiency

Homeowners who make improvements to the energy efficiency of their homes are also eligible for credits that reduce their tax bill. There are two types of energy-related credits to choose from:

• Energy Efficient Home Improvement Credit: This credit is a percentage of the total improvement expenses, such as exterior doors, windows, and central AC, in the year of installation. Starting in 2023, there’s a 30% cap on this credit with a maximum of $1,200 and no lifetime limit. 
• Residential Clean Energy Credit: Similar to the credit above, this one also has a max percentage of 30% but with no annual maximum or lifetime limit. This credit mostly applies to solar, wind, and geothermal power generation. 

Specific qualifications and more details can be found on the government’s Energy Star website, with IRS guidance here.

Other Benefits of Homeownership

Whether you’re a current or aspiring homeowner, there are a lot of tax benefits to get excited about. Given the potential savings, it’s important to keep a close eye on your available deductions and credits to maximize your refund or reduce your owed taxes each year. 

In addition to these tax benefits, homeowners can also benefit from financial stability, wealth and savings growth, and the freedom and pride that come with homeownership. 

Not Quite Ready for Homeownership? Divvy Could Help

If you’re hoping to reduce your tax bill by becoming a homeowner but aren’t there just yet, Divvy could help! With Divvy, you can prepare for homeownership by renting a home with an option to purchase. Additionally, a portion of your monthly payment can go toward your homeownership goals, like down payment savings, which you could use to purchase the home at the end of the lease. And, if you change your mind, you can walk away with your savings, minus a relisting fee of 2% of the initial purchase price.

Interested? Learn more about Divvy at the links below:

• How Divvy works
• Where Divvy operates
• Divvy’s qualifications

Common Questions About the Tax Benefits of Homeownership

Is buying a house good or bad for taxes?

Buying a house is usually good for your taxes, depending on your financial situation. While becoming a homeowner is a big financial commitment, it comes with tax advantages such as mortgage interest and property tax deductions that don’t exist for renters. Homeowners can potentially save more money during tax season because of the available deductions.

Can you write off home improvements from your taxes?

Depending on type of home improvement, you may be able to save money on your taxes. Capital improvements, such as replacing an AC system or installing a new roof, could reduce your capital gains tax responsibility if you choose to sell the home. Additionally, some energy-efficient improvements can lead to tax benefits or credits.

Is painting your house tax deductible?

While a fresh coat of paint can improve the quality and appearance of a house, it doesn’t qualify for a tax deduction since it’s not a major capital improvement. Only modifications to a house that significantly improve its safety, quality, or lifespan tend to be tax deductible.

At what income level do you lose mortgage interest deduction?

Great news — there is no income limit for the home mortgage interest deduction. As long as you’re a taxpayer with a qualified home, you can take advantage of the mortgage interest deduction if you choose to itemize your tax deductions.

What types of homeowner expenses can’t be deducted from your taxes?

Some example of homeowner expenses that can’t be deducted from your taxes include homeowners insurance, basic home improvements (such as paint or shutters), refinancing costs, and home office/work-from-home expenses (if you’re not self-employed).

Sources

IRS, Credits & Deductions for Individuals: https://www.irs.gov/credits-deductions-for-individuals 

IRS, Should I Itemize? https://www.irs.gov/taxtopics/tc501 

IRS, Home Mortgage Interest Deduction: https://www.irs.gov/publications/p936 

IRS, Home Mortgage Points: https://www.irs.gov/taxtopics/tc504 

IRS, Deductible Taxes: https://www.irs.gov/taxtopics/tc503 

Intuit, Home Improvements and Your Taxes: https://turbotax.intuit.com/tax-tips/home-ownership/home-improvements-and-your-taxes/L6IwHGrx6 

IRS, Sale of Your Home: https://www.irs.gov/taxtopics/tc701 

IRS, Business Use of Home: https://www.irs.gov/taxtopics/tc509 

FDIC, Mortgage Tax Credit Certificate: https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-2-docs/mortgage-tax-credit.pdf 

IRS, Home Energy Tax Credits: https://www.irs.gov/credits-deductions/home-energy-tax-credits 

ENERGY STAR, Federal Income Tax Credits and Incentives for Energy Efficiency: https://www.energystar.gov/about/federal_tax_credits 

Intuit, Home Improvements and Your Taxes: https://turbotax.intuit.com/tax-tips/home-ownership/home-improvements-and-your-taxes/L6IwHGrx6

*A surrender fee will apply if you end your lease early or are not in good standing based on the expectations in the lease agreement. You may also be responsible for any owed costs at lease end, such as damage-related costs, unpaid rent, and others.