How does owning a home help with taxes? While most people understand the general advantages of homeownership, many fail to understand how much it can benefit you during tax season.
Owning a home can save you thousands in taxes every year. However, most people are unaware of how to claim it and often end up giving that money right back to the IRS.
In this guide, we'll break down all the tax advantages of owning a home and how to ensure you're actually getting those savings. By the end, you'll know how to keep more of your income and make your home work harder for you financially.
9 Tax Advantages of Buying a Home You Should Know
The US government has a long history of enacting policies aimed at encouraging homeownership as a way to promote financial stability and boost the overall economy. As a result, there are numerous tax benefits of owning a home that all buyers should know. Here are the major tax advantages you should be aware of.
Mortgage Interest Deduction
Imagine buying a house and the IRS actually helps you pay for it...well, that's what the mortgage interest deduction is all about. Taking advantage of this home purchase tax deduction is like having a silent partner who pays your interest bill every year, no strings attached.
It allows homeowners to deduct up to $750,000 of mortgage debt, which can be especially valuable in the early years when interest rates are high. It's one of the major tax advantages of a mortgage that many overlook, but it can add up to significant savings.
Most people don't realize, the US government actually wants you to own a home. When homeownership rates are high, there's more economic stability, more long-term wealth, and less reliance on government programs later in life.
So, the tax advantages of buying a home are there for a reason. But most people fail to see how that translates into more dollars in their pocket.
Property Tax Deduction
Other than mortgage interest, there are several other tax deductions for homeowners you should be aware of, including the property tax deduction.
The state and local tax (SALT) deduction allows you to deduct up to $10,000 of taxes paid to state and local agencies from your federal income tax bill, including property taxes. The SALT deduction is a significant benefit for homeowners, particularly for those residing in high-tax states like New York or California.
Lawmakers in Washington are even debating the possibility of raising the SALT tax cap. But for now, you can still safely deduct up to $10,000, which can result in significant savings.
Mortgage Points Deduction
Mortgage point deductions for a new home purchase can also yield significant savings. Mortgage points are different from interest; they refer to any fees you pay to the lender at closing to lower your interest rate. Mortgage points not only lower your monthly payment, but they can also be used as a tax break for buying a house.
Mortgage points are a form of prepaid interest, which means they are also deductible, usually in full the year you buy the home. It's one of those one-time tax benefits of homeownership that buyers often overlook. While it isn't an annual savings benefit quite like the interest deduction, it can help offset some of the upfront costs of your recent home purchase.
Capital Gains Exclusion When Selling
The capital gains exclusion can also be a major tax benefit when it comes time to sell. Let's say you own your home for a few years, then decide to sell, and in that time, the value's gone up. As long as you've lived there for at least two of the past five years, you can walk away with up to $250,000 (or $500,000 if you're married) completely tax-free.
You don't need to report a 1031 exchange or immediately reinvest in another property. That money is yours to keep. Capital gains are one of the tax benefits of buying a home that many people forget about when they first make a purchase, but they can be a lifesaver when it's time to sell.
Itemizing vs. Standard Deduction
However, keep in mind that you can only take advantage of these benefits when filing taxes as a homeowner if you itemize your deductions, as opposed to accepting the standard deduction.
The standard deduction is a set amount determined by the IRS every year that you can write off based on your filing status. It's a simpler option because you don't have to track individual expenses. However, you also miss out on potential deductions.
Itemizing your deductions allows you to subtract specific costs, including homeownership expenses like mortgage interest and property taxes. It is more work, but if you're a high earner with a decent-sized mortgage and real estate taxes, there's a good chance itemizing will save you more than the standard deduction. So it's worth doing the math or hiring a CPA if you want to take full advantage of all the tax benefits of homeownership.
Tax Savings Offset Monthly Costs
It's also important to consider the tax benefits of owning a house vs renting if you're debating which option makes the most sense for your current financial situation. Everyone focuses on the monthly payment when deciding whether it's time to buy.
However, many people fail to factor in the tax benefits of homeownership and how that impacts their overall monthly expenses. Once you account for the tax savings of buying, your effective monthly cost ends up being lower than it looks on paper, especially in the first few years. So don't ignore the tax advantages of homeownership if you're on the fence.
Tax Perks From Investment Properties
There are also plenty of tax benefits to owning an investment property. If you've ever thought about owning a rental property, the tax perks are on another level.
According to Mukul Lalchandani, founder of Undivided, "I own two investment properties, and the deductions I get are incredible. We're talking mortgage interest, taxes, insurance, maintenance, repairs, depreciation, all of it. And the best part? These write-offs don't just reduce the taxes on your rental income. They actually lower your personal tax bill, too."
So the tax benefits for buying a house aren't just for those purchasing a primary residence; they can also benefit investors in more ways than one.
Timing Still Matters
While most of these benefits become apparent when you file, the timing of your purchase still matters. If you purchase late in the year, you can still deduct any interest and property taxes paid at closing, so make sure to send that closing disclosure to your CPA.
Accountable Plans for Home Office and Garage
Accountable plans are another often-overlooked tax credit for business owners who own a home. Accountable plans enable businesses to reimburse their employees for specific business-related expenses, including those incurred at home offices. So, if you’re a business owner who uses parts of your home for work-related activities, your company can reimburse you for using the space.
According to Mukul, "I have a bedroom in my home that's fully dedicated to work, it's where I shoot videos just like the ones you see on my YouTube channel. I also use my garage exclusively for my company car and staging materials. Instead of trying to squeeze a home office deduction, I just have my business reimburse me for the use of those spaces through an accountable plan. It's clean, compliant, and the reimbursements are tax-free."
Ultimately, homeownership isn't just about building equity or locking in your monthly payment. It's a massive tax advantage, but only if you know how to use it.
Learning about all the tax advantages of buying a home is a great first step. However, finding a home that fits your budget and lifestyle and doing the math to determine how these tax benefits will impact your finances is a bit more complicated. Thankfully, Undivided can help.
