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The Most Common Tax Deductions for Homeowners

Tax season is upon us. Or if not, it soon will be, as one could argue taxes are always upon us.

Fortunately, there are numerous tax breaks that American homeowners can qualify for based on their real estate holdings. In some cases, these deductions can result in thousands of dollars in savings. The key is knowing about these tax-deductible items and how to take advantage of them when you file your tax return. You may already know that your mortgage interest may be tax deductible, but that’s just one of many tax deductions for homeowners to consider. Let’s break down potential tax benefits that can make homeownership more affordable – and rewarding!

What are tax deductions?

Let’s start by explaining tax deductions. These are reductions in the amount of taxable income you put on your annual tax return, and they reduce the amount you pay in taxes. (Hint: You can also think of this as a tax write off or a tax break). There are two types of deductions: standardized and itemized. While both can decrease your taxable income, a standard deduction is a specific dollar amount set by the IRS that allows you to reduce your taxable income by a standard amount.

On the other hand, an itemized deduction is a qualifying expense (of which there are hundreds) where the amount is unique to you. Examples include state/local income taxes and homeowner expenses such as mortgage interest and property taxes. Unfortunately, there are also non-deductible housing expenses, such as homeowner association fees, closing costs, moving expenses (unless you’re in the military), title insurance, etc.

When filing, you’ll need to decide whether to claim standard or itemized deductions, and the decision depends on whether the sum of your eligible itemized deductions exceeds the standard deduction. To take advantage of the various tax deductions for homeowners, you will have to itemize deductions. But again, if the standard deduction gives you more of tax break than if you itemized your deductions, you’ll likely want to take the standard deduction!

Now we’ll go through some of the most common tax deductions for those who choose to itemize.

What are the most common tax deductions for homeowners?

1. Mortgage interest deduction:

The most common tax write off for homeowners is the mortgage interest deduction, which allows homeowners to deduct all their mortgage interest payments. For many, interest payments comprise the vast majority of the first few years of mortgage payments. So deducting them can significantly reduce one’s tax liability.

The Tax Cuts and Jobs Act (TJCA) lowered the previous limit of $1,000,000 in mortgage debt that could be deducted to $750,000. If you originated a mortgage on December 16, 2017, or after, you’re limited to $750,000. If you originated a mortgage between October 14, 1987 through December 15, 2018, you can deduct up to $1,000,000. And if your mortgage is older than the October 1987 date, all of your mortgage interest may qualify.

Your mortgage lender is required to issue Form 1098 when you’ve paid more than $600 in interest during a tax year. Still, it’s helpful to talk to your mortgage servicer to obtain a copy of your mortgage interest statement and determine much interest you’re paying. You should also talk to a tax advisor if you have questions, including if you’re married filing jointly or married filing separately, as this can impact if, or how much of your mortgage interest is tax deductible.

2. Private Mortgage Insurance (PMI) deduction:

In general, homeowners who submit smaller down payments (20 percent or less of the sale price) must pay PMI, which protects the lender in the event you aren’t able to make your payments. For many homeowners, PMI can represent a significant portion of their monthly mortgage payment. The IRS previously viewed mortgage insurance as it did mortgage insurance, meaning homeowners could deduct it. However, because of tax code changes, this deduction expired at the end of 2017 but was then extended to include premiums paid through the 2021 tax year(filed in 2022). To qualify for this deduction, your mortgages must have originated in 2007 or later and must meet other specifications, including criteria related to adjusted gross income.

3. Mortgage points deduction:

Also referred to as the mortgage origination deduction, the mortgage points deduction allows homeowners to deduct the points they paid on the purchase or refinance of their home. Homeowners are given the option to purchase discount points to lower a loan’s interest rate, and these can be tax deductible (loan origination points, on the other hand, cannot). To utilize the deduction, homebuyers who buy must deduct all of the points they paid in a particular tax year. Homeowners who paid discount points on a refinance must deduct the points over the life of the loan.

4. Home office deduction:

One of the most commonly used tax deductions for homeowners who are among self-employed professionals, the home office deduction allows homeowners or renters to write off certain home office expenses, including a portion of their rent, utilities, and other home-related expenditures. To qualify for this tax deduction, homeowners must be self-employed (you won’t qualify as the employee of a company, even if you work from home) and must use a portion of their home exclusively for their business endeavors. On a related note, some business-related out-of-pocket expenses, meaning items you pay for on your own such as equipment or supplies, can also potentially be deducted from your income taxes.

5. Home equity loan interest deduction:

If you’ve taken out a home equity loan or line of credit to make home improvements, you’re in luck. Interest on these loans may be tax deductible, but as of the Tax Cuts and Jobs Act of 2018, this is only applicable if you use the funds to “buy, build or substantially improve” your home, per the IRS. In other words, you can’t use the funds to pay off personal debt or put toward college tuition and then expect a tax break when you file your return. Home equity loan interest may not be eligible for tax deduction, depending upon IRS rules which are subject to change, and it is recommended that you consult a tax adviser for further information regarding the deductibility of interest and charges.

6. Property tax deduction:

As a homeowner, you’re likely familiar with paying both state and local property taxes. Fortunately, depending on where you live, you can deduct up to $10,000 in property taxes (combined for both state and local) on your tax return. Talk to a tax advisor to get up to speed on the specific tax deductions that apply to your geographic location.

What are some other tax considerations?

On the flip side of tax deductions are tax credits, including the mortgage tax credit, designed to help low and moderate-income, first-time homebuyers. Formally known as a Mortgage Credit Certificate (MCC), this homebuyer assistance program allows mortgage lenders to convert a portion of the qualified homebuyers’ interest into a tax credit, thus increasing the tax benefits of owning a home. If owning a home is currently challenging because of the pandemic, you may wish to ask your loan servicer about homeowner pandemic relief, which may allow you to pause or reduce your mortgage payments due to financial difficulties.

The financial benefits of owning a home aren’t limited to tax credits and tax deductions for homeowners. There are a whole host of financial benefits to being a homeowner, and the better your credit is, the more these can translate to better mortgage rates and terms. Borrowers who are concerned about housing expenses would do well to talk to not only a tax professional, including how their tax bracket figures in, but also to a mortgage professional about their options for making homeownership an affordable reality.

*AmeriSave Mortgage Corporation and its affiliates do not provide tax or financial advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or financial advice. We encourage you to consult with your own tax or financial advisors about the tax or financial implications of your home loan and to identify a plan that works best for your particular situation.

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