Key Takeaways:
- Homeowners may qualify for valuable tax deductions (like mortgage interest, property taxes, and mortgage points) and tax credits (like energy‑efficiency and renewable energy credits).
- The mortgage interest deduction allows most homeowners to deduct interest on up to $750,000 of qualifying mortgage debt if they itemize.
- The property tax deduction is subject to the state and local tax (SALT) limit, which is up to $10,000 through 2024 and up to $40,000 in 2025.
- Energy‑related credits can cover up to 30% of qualifying home improvement or renewable energy costs, with some annual caps.
- Certain lower‑ and moderate‑income buyers with a Mortgage Credit Certificate can claim a federal mortgage interest credit of up to $2,000 annually.
- The home sale exclusion lets qualifying sellers exclude up to $250,000 in capital gains ($500,000 for joint filers) when selling their primary residence.
Owning a home offers significant opportunities to save money at tax time. The tax breaks for homeowners can include both deductions, which reduce your taxable income, and credits, which reduce your tax bill dollar‑for‑dollar. Understanding which ones apply to you could mean hundreds or even thousands of dollars in savings each year. In this guide, we’ll break down the most valuable homeowner tax benefits, from mortgage interest and property taxes to energy‑efficiency credits, home sale exclusions, and more. We’ll also cover important limits, documentation requirements, and timing considerations so you can plan ahead.
Understanding Tax Breaks for Homeowners
Before we dive into specific deductions and credits, it’s important to understand the difference:
- Tax deductions lower your taxable income. For example, if you have $80,000 in taxable income and claim a $5,000 deduction, you’ll be taxed on $75,000 instead.
- Tax credits directly reduce your tax liability. If you owe $3,000 in taxes and have a $1,000 credit, your tax bill drops to $2,000.
Both types can help homeowners, but they work in different ways.
Mortgage Interest Deduction
For many homeowners, the mortgage interest deduction is the most significant tax break. If you itemize your deductions instead of taking the standard deduction, you can generally deduct interest paid on loans used to buy, build, or substantially improve your primary or second home.
Key Rules
- You can deduct interest on up to $750,000 of qualifying mortgage debt if the loan originated after December 15, 2017. For older mortgages, the limit is $1 million.
- Married couples filing separately have a $375,000 limit for newer loans ($500,000 for older ones).
- The deduction applies to both first and second homes, as long as they meet IRS definitions.
Mortgage Interest Deduction Example
If you bought your home in 2022 for $600,000 with a 6% interest rate, you may have paid roughly $35,000 in interest in the first year. If you itemize, you could deduct the entire amount. This could potentially save thousands depending on your tax bracket. The amount you can deduct will be shown on Form 1098, which you’ll receive from your lender each January. Keep this for your records.
Property Tax Deduction
If you itemize your deductions, you may be able to deduct the property taxes you’ve paid on your home and other real estate you own. However, there are important rules, limits, and exceptions to understand before claiming this tax break.
What Counts as Deductible Property Taxes
You can deduct real estate taxes on your primary residence and any other real property you own, starting from the date you take legal ownership. This date is typically listed on your settlement statement at closing. If you agree to pay the seller’s overdue taxes from a prior year as part of the purchase, you cannot deduct those payments. They’re considered part of your home’s purchase cost, not a property tax deduction.
Certain charges on your property tax bill may look like taxes but aren’t deductible. Common examples include fees for trash collection or water service, fines for code violations, and local benefit assessments like sidewalk or road construction. Only maintenance or repair costs that are itemized separately by the taxing authority may be deductible.
SALT Deduction Limits
For tax years 2018 through 2024, the total deduction for state and local taxes (SALT), including property taxes, is capped at $10,000 per return ($5,000 if married filing separately). In 2025, the cap temporarily increases to $40,000, though the limit may be reduced for higher‑income taxpayers.
Property Taxes Paid Through Escrow
If you pay property taxes through your monthly mortgage escrow, you can only deduct the amount your lender actually paid to the tax authority during the year. This figure is often listed on Form 1098 but can also be confirmed through your property tax receipts.
Mortgage Points Deduction
When you buy a home, you might pay mortgage points to lower your interest rate. Mortgage points are upfront fees you pay to your lender at closing to lower your interest rate on a home loan. One point typically costs 1% of the loan amount and reduces the rate by a small percentage, which can save you money over time if you keep the mortgage long enough. These points can be deducted as prepaid interest if certain IRS conditions are met.
Mortgage Points Deduction Example
If you paid $6,000 for points on a $600,000 loan, you may be able to deduct the full amount in the year you purchased the home. This is provided the loan was for your primary residence and other IRS rules apply. If not, you may need to spread the deduction over the life of the loan.
Home Equity Loan Interest
Interest on home equity loans and lines of credit (HELOCs) may still be deductible if the borrowed funds are used to buy, build, or substantially improve the home securing the loan. Using the funds for personal expenses like vacations or debt consolidation does not qualify.
Home Equity Loan Interest Example
If you use a $50,000 HELOC to remodel your kitchen, the interest could be deductible. But if you use the same $50,000 to pay off credit cards, it won’t qualify.
Energy Efficient Home Improvement Credit (IRC 25C)
This energy tax credit, available through 2025, covers 30% of the cost of certain energy‑efficient upgrades to your home, with annual limits.
Eligible Improvements
- Energy‑efficient doors, windows, and skylights
- Insulation
- HVAC systems, including heat pumps
- Water heaters
- Home energy audits
Limits
- Up to $1,200 per year for most improvements
- Up to $2,000 per year for heat pumps, biomass stoves, and certain water heaters
Example
If you install $5,000 worth of qualifying windows in 2025, you could claim a $1,500 credit (30% of the cost), but since the annual limit for windows is $600, your credit would be capped at that amount.
Residential Clean Energy Credit (IRC 25D)
If you install renewable energy systems such as solar panels, wind turbines, geothermal systems, or certain battery storage, you may qualify for this credit. The credit is 30% of eligible costs, including labor. There is no annual or lifetime cap through 2025, after which it will expire.
Starting in 2025, for certain qualified property, no credit will be allowed unless the item was produced by a qualified manufacturer and the taxpayer reports the associated PIN on their tax return.
Example
A $20,000 solar panel installation in 2025 could generate a $6,000 credit. If your total tax liability is less than the credit, you can carry forward the unused portion to future years.
Mortgage Interest Credit
The mortgage interest credit is a federal tax credit designed to make homeownership more affordable for certain lower‑ and moderate‑income buyers. It’s available only to homeowners who receive a Mortgage Credit Certificate (MCC) from a state or local housing finance agency.
The MCC is worth up to 20% of your annual mortgage interest that can be claimed as a dollar‑for‑dollar tax credit against your federal income tax liability. The maximum credit is $2,000 per year.
Who Qualifies
While requirements vary by state or locality, MCC programs generally target first‑time homebuyers or those purchasing in designated “target areas.” Typical qualifications include:
- First‑time homebuyer status (no ownership interest in a principal residence within the past three years, with exceptions for targeted areas, active military members, and veterans)
- Meeting income and home purchase price limits set by the issuing agency
- Owner‑occupancy of the home as your principal residence
- Obtaining a new mortgage (MCCs usually don’t apply to refinanced loans)
Important Considerations
- The mortgage interest credit is a credit, not a deduction, so it directly reduces your tax bill.
- The credit must be filed for annually using Form 8396.
- Selling your home within nine years of receiving the MCC may trigger a partial or full repayment of the credit under federal recapture rules.
Selling Your Home: The Home Sale Exclusion
When you sell your primary residence, you may be able to exclude up to $250,000 of capital gains from your taxable income, or up to $500,000 if married filing jointly.
Requirements
- You must have owned and lived in the home for at least 2 of the past 5 years before the sale.
- The exclusion generally applies once every two years.
Example
If you bought your home for $300,000 and sold it for $550,000 after living there for three years, you could exclude the $250,000 gain entirely if you meet the ownership and use tests. Be sure to keep records of major improvements, as they increase your cost basis and can reduce taxable gain. For example, a $50,000 kitchen remodel increases your basis, which could help you stay under the exclusion threshold.
State and Local Incentives
Beyond federal programs, many states and municipalities offer additional homeowner tax incentives, often focused on energy efficiency or home improvements. For example, California offers rebates for solar panels and battery storage that can be combined with federal credits. Texas offers property tax exemptions for certain renewable energy installations. Check with your state’s energy office or local government for current programs.
Timing and Compliance Considerations
Some homeowner tax breaks are set to expire or phase out in the coming years. For instance, the Residential Clean Energy Credit expires after 2025 under the One Big Beautiful Bill.
Documentation and Forms
To claim these tax breaks, maintain thorough records:
- Form 1098 for mortgage interest
- Property tax bills and proof of payment
- Receipts and invoices for home improvements
- Manufacturer certifications for energy‑efficient products
- Form 5695 for energy credits
Keeping organized documentation not only makes filing easier but also protects you in case of an IRS audit.
Frequently Asked Questions
What can a homeowner write off on taxes?
Homeowners may be able to deduct mortgage interest, property taxes, mortgage points, and in some cases interest on home equity loans or lines of credit. Those who qualify may also claim tax credits for energy‑efficient or renewable energy home improvements.
Can I deduct home improvements on my taxes?
Most home improvements are not immediately deductible, but upgrades that increase your home’s value can reduce capital gains taxes when you sell by increasing your cost basis. Certain energy‑efficient improvements may qualify for a federal tax credit worth up to 30% of the cost. These, however, will expire after 2025.
Are closing costs tax deductible?
Most closing costs are not deductible, but some, like mortgage points paid to reduce your interest rate, may be deductible in the year you buy your home. Other costs, such as property taxes paid at closing, may also be deductible if you itemize.
Can you deduct home utilities on taxes?
In most cases, you cannot deduct home utilities like electricity, gas, or water. However, if you have a qualifying home office for business purposes, you may be able to deduct a portion of your utility costs based on the percentage of your home used for business.
Should I get a tax refund if I bought a house?
Buying a home doesn’t automatically mean you’ll get a tax refund, but you may qualify for deductions and credits that lower your tax bill. Whether you receive a refund depends on your overall tax situation, including income, withholdings, and other deductions.
Tax Help for Homeowners
The tax code offers homeowners numerous ways to save, from deductions like mortgage interest and property taxes to credits for energy‑efficient upgrades and renewable energy systems. Whether you’re buying your first home, making improvements, or selling, understanding these benefits can help you make smarter financial decisions. The key is knowing which tax breaks apply to your situation, tracking your expenses carefully, and staying aware of changing laws. If you’re unsure, consulting a qualified tax professional can ensure you maximize your savings while staying compliant with IRS rules. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
If You Need Tax Help, Contact Us Today for a Free Consultation