The 8 Top Tax Benefits of Home Ownership

September 13, 2016 | Buying a Home | By: The Goodhart Group

Most people know that home ownership offers tremendous financial benefits. Your home is likely the biggest investment you will ever make! As such, it can significantly build your wealth over time. Making that monthly mortgage payment creates equity (vs. paying rent to build up your landlord’s).

Though real estate values may fluctuate, over the long haul, buying your home is always a solid investment.

Homeownership also serves as a good hedge against inflation. With a fixed rate mortgage, you are guaranteed to pay that rate, despite what may happen to the economy. Even adjustable rate mortgages cap how much and how often the interest rate and/or payments can vary in a year and through the entire mortgage period.

Perhaps the most important of the financial advantages of home ownership are its tax benefits. There are quite a few! We will break down the main ones for you here. Keep in mind, to take advantage of them, you will need to itemize your deductions and consult with a financial professional or tax advisor (we can connect you with some excellent ones). Disclaimer-we are not tax advisors; please consult a professional if you have questions! (Note: This original post has been updated since the passing of the new tax law in early 2018, but again, please contact your tax advisor with any specific questions. You can read more about the new tax law here.)

The Big One: Mortgage Interest is a Tax Deduction

The best tax break of home ownership is being able to deduct your mortgage interest from your federal income tax return. You can deduct interest on up to $750,000 of your home mortgage amount.

For the first few years you own your home, the interest portion of the payment is roughly ⅔ of your monthly mortgage, which can translate into a significant tax break and cut down on what you owe Uncle Sam every April. For example, if you have a $500,000, 30-year mortgage at a fixed rate of 4%, you will enjoy a tax savings of $4,960 in your first year (assuming you’re in the 25% tax bracket). Over the life of the loan, you will save $89,837 in taxes!

The Runner Up: Capital Gains Protection

Tax law also allows you to shelter a large amount of profit you make when you are ready to sell your home. If you’re married filing jointly, $500,000 of your capital gains are sheltered; $250,000 for single homeowners. FYI: your gain is actually your home’s selling price, minus deductible closing costs, selling costs, and your tax basis in the property. So be sure to include the commission you pay, title insurance, any fees (legal, inspection, etc) and money spent prepping the house for sale when calculating your gain.

For example, suppose you are a single woman selling a condo you bought ten years ago for $350,000. The closing price is $650,000. You spent $50,000 in fees, commissions, and getting the condo ready for sale. You may think you had maxed out your $250,000 shelter with the sales price, with the closing and selling costs, you might owe no capital gains tax at all!

Of course, certain conditions must be met:

  • you owned the home for at least two years in the five years before the sale;
  • the home was your primary residence for a total of at least two years of that same period; and
  • you did not exclude these gains from another home sale in the two years before the sale.

To use this exclusion again on another property, please check with a tax professional.

More tax breaks for your federal return:

Points are Deductible Too!

Points, or discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. A point is equal to 1% of the loan amount. For example, the value of a point on a $250,000 mortgage would be $2,500. The points paid to ensure a loan rate are tax deductible, as long as the you as the buyer pay them (vs. the seller.) Also, the cash for your down payment must equal to any points paid. Be sure to deduct the points within the year that you bought the home.


As Are Your Your Property Taxes!


Your annual property taxes are a deduction for as long as you own your home up to $10,000. These local taxes are based upon the assessed value of your home. The more your home is worth, the higher your property tax bill. Fortunately, property taxes are deductible from your federal income taxes. You will pay your taxes either through an escrow account with your lender or directly to the municipality. Check your records to determine this amount and deduct away!


Do You Pay PMI? Deduct Those Premiums.


For mortgages issued in 2007 or later, home buyers can deduct the premiums paid for Private Mortgage Insurance, or PMI.

You may be asking, “What is PMI?” If you have a mortgage but didn’t have a 20%+ down payment, your lender will require the mortgage be insured. Many lenders offer programs with just 10-15% down, so we see this scenario quite often. Yes, PMI is another cost, but the good news is that those premiums can be deducted, so long as your income is less than $100,000.

FHA, VA, and the Rural Housing Service loans also require insurance. Some of those premiums are deductible as well. These loans are more complex, so plan to consult a professional to take advantage of these deductions.


First Time Buyer Special


First-time home buyers often tap into their IRAs for the down payment for their first home. Normally, the IRS charges a 10% penalty for pre-age 59½ withdrawals, but not in this case. Homebuyers can use up to $10,000 ($20,000 for a married couple) of IRA funds toward the purchase of a first home.

The best news? You don’t have to be purchasing your very first home to take advantage of this option. Technically, as long as you (or your spouse) didn’t own a principal residence during the previous two years, you qualify. Feeling generous? You can take advantage of this option for a child, grandchild, or a parent.

You must use these IRA funds within 120 days of withdrawal. So act quickly when using this option. Also, know that these funds will be taxed in your top bracket.


Save Those Home Depot Receipts!


Save receipts and records for all improvements you make to your home. In tax-speak, a home improvement project substantially adds to the value of your home, increases its useful life, or adapts it to new uses. Think of additions, remodeled kitchens and bathrooms, decks and fencing, landscaping, electric and plumbing upgrades, and new roofs.

While you can’t deduct these costs now, when you sell your home, they are added to the purchase price of your home. This new number is the “cost basis” of your home for tax purposes, or in lay terms, the amount of your investment in your home. The greater your basis, the less profit (see capital gains section above) you’ll receive when you sell your home, which translates to a lower tax bill when you do sell.


Go Green & Save


Energy-saving home improvements can earn you an additional tax break in the form of an energy tax credit worth up to $500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar. Click here to learn more about these types of credits (this opportunity only applies to your primary residence).


The Bottom Line

Buying a home is almost always a wise financial decision. It offers tremendous financial benefits, most notably on the tax front. Contact us if you’d like to talk through your options. We can also connect you with a tax professional who knows the ins and outs of real estate tax implications. We are always happy to help!

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  1. I like that you mentioned that home improvements can earn you tax breaks. My wife and I are looking to buy our first home, and for a while, we were unsure whether we should rent or own. Thanks for the information–I’m glad we’ve decided to buy a house!

  2. That’s so cool that your property taxes are deductible for you as long as you actually own your home. Thanks for letting me know that. My husband and I were debating about whether we should get a house or a condo. I think that you’ve convinced us though, and we’ll have to find a good family home for sale.

  3. I had no idea that owning a home could give this many benefits. It’s cool that you said that your mortgage interest is a tax deduction! I’m all about finding new deductions to take advantage of, and it sounds like I need to convince my wife that we should buy a home.

  4. Thanks for pointing out that a first-time homebuyer can use an IRA fund of up to $10,000. My husband and I have been married for about two years now, and we think that it’s time that we settle down. Your tips will really help us get our first house.

  5. It’s good to know more about owning a home. My wife and I are looking at buying a place this year, so it’s awesome to think that doing so can get us tax breaks. I love how you said that we can deduct our mortgage interest from our federal tax return. We’ll remember that!

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