Top Ten Tax Deductions for Owning a Home

They say owning a home is the American dream, and borrowing to pay for one is a taxpayer’s dream. Having recently purchased my first home, I was interested in the tax benefits now available to me. Here are the top ten:

1. Mortgage Interest

If you’re filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first and second home. The maximums are halved for married taxpayers filing separately. You can’t use the $1 million deduction if you pay cash for your home and later use it as collateral for an equity loan.

2. Points

Your mortgage lender will charge you a variety of fees, one of which is called “points.” A point is calculated at 1% of the loan principal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. You cannot deduct a mortgage broker’s commission. Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.

3. Equity Loan Interest

You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as “home equity” for this deduction. Your total is limited to the smaller of:

  • $100,000 (or $50,000 for each member of a married couple if they file separately), or
  • the total of your home’s fair market value — that is, what you would get for your house on the open market — less certain other outstanding debts against it.

4. Home Improvement Loan Interest

If you take out a loan to make substantial home improvements, you can deduct the interest on this home improvement loan. There is no dollar limit on this deduction. However, the work must be a “capital improvement” rather than ordinary repairs. Qualifying capital improvements are those that increase your home’s value, prolong its life, or adapt it to new uses.

5. Property Taxes

Often referred to as “real estate taxes,” property taxes are fully deductible from your income. You can’t deduct escrow money held for property taxes until the money is actually used to pay your property taxes. A city or state property tax refund reduces your federal deduction by a like amount.

6. Home Office Deduction

If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.

7. Selling Costs and Capital Improvements

If you decide to sell your home, you’ll be able to reduce your taxable capital gain by the amount of your selling costs.

8. Capital Gains Exclusion

This is a true tax shelter for those who are treating home buying as an investment. Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer suffer a taxable gain. Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000 apiece tax free — including single people who own a home jointly.

9. Moving Costs

If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet some fairly complicated requirements.

10. Mortgage Tax Credit

A home-buying program called mortgage credit certificate (MCC) allows low-income, first-time home buyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. You must first apply to your state or local government for an actual certificate.