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Buying a home comes with several tax benefits that can help make homeownership more affordable. This guide explores the key tax advantages available to homeowners, helping you understand how to maximize your savings.
Understanding Tax Credits and Deductions
Tax benefits for homeowners come in two forms:
- Tax Credits: These directly reduce your tax bill dollar-for-dollar. For example, a $1,000 tax credit lowers your taxes by $1,000.
- Tax Deductions: These reduce your taxable income. The actual savings depend on your tax bracket. For instance, if you’re in the 24% tax bracket, a $1,000 deduction saves you $240 in taxes.
Key Tax Deductions for Homeowners
Mortgage Interest Deduction
You can deduct interest paid on up to $750,000 of mortgage debt ($375,000 if married filing separately). This limit applies to homes purchased after December 15, 2017. For homes bought before this date, the limit is $1 million ($500,000 if married filing separately).
Mortgage Points Deduction
Points paid to lower your interest rate are tax-deductible. You can deduct them in full in the year you pay them for a new home purchase, or over the life of the loan for refinancing.
Property Tax Deduction
Part of the State and Local Tax (SALT) deduction, you can deduct up to $10,000 ($5,000 if married filing separately) in combined state and local taxes, including property taxes.
Home Sale Exclusion
When selling your primary residence, you may exclude up to $250,000 of profit ($500,000 for married couples filing jointly) from capital gains tax. To qualify, you must have owned and lived in the home for at least two of the five years before the sale.
Itemizing vs. Standard Deduction
To claim these deductions, you must itemize on your tax return. Compare your total itemized deductions to the standard deduction to determine which option saves you more money.
Standard deduction amounts for 2025:
- Single filers: $15,000
- Married filing jointly: $30,000
- Head of household: $22,500
Energy-Efficient Home Improvements
Some energy-efficient home improvements may qualify for tax credits. Check energy.gov for current incentives in your state.
Considerations for Homeowners
- Keep detailed records of all home-related expenses.
- Consult a tax professional to ensure you’re maximizing your deductions.
- Remember, paying off your mortgage quickly can be more beneficial than maintaining interest payments for tax deductions.
Understanding these tax advantages can help you make informed decisions about homeownership and potentially save money on your taxes. Always stay informed about current tax laws, as they may change over time.