What Mortgage Costs Are Tax Deductible? Here’s How Owning a Home Can Save You Money During Tax Time
Homeownership comes with numerous financial responsibilities, but it also offers significant tax benefits. One of the most valuable perks is the ability to deduct certain mortgage costs from your taxable income.
These deductions can save you thousands of dollars annually, making homeownership even more rewarding. Let’s dive into what mortgage costs are tax deductible and explore other ways homeowners can save on their taxes.
Mortgage Interest Deduction
The most substantial tax benefit for homeowners is the mortgage interest deduction. If you’re paying interest on a mortgage for your primary residence or a second home, you can deduct that interest on your tax return. However, there are limits:
For mortgages taken out after December 15, 2017, you can deduct interest on the first $750,000 of mortgage debt ($375,000 if married filing separately).
For mortgages taken out before this date, the limit is $1 million ($500,000 if married filing separately).
Keep in mind, to claim this deduction, you must itemize your deductions rather than taking the standard deduction.
Points Paid on a Mortgage
If you paid points to lower your mortgage interest rate, these costs might also be deductible. Typically, points paid on a new mortgage for your primary home are deductible in the year they’re paid. For refinancing or second-home mortgages, the deduction is usually spread over the loan's term.
Property Taxes
Property taxes are another significant deductible expense for homeowners. Under the State and Local Taxes (SALT) deduction, you can deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
Private Mortgage Insurance (PMI)
If your down payment was less than 20% and you’re paying private mortgage insurance (PMI), you may be eligible to deduct those premiums. This deduction is income-dependent and begins to phase out for taxpayers with adjusted gross incomes above $100,000 ($50,000 if married filing separately). Note that the availability of this deduction depends on current tax laws, so consult a tax professional to confirm eligibility.
Other Ways Homeowners Save on Taxes
Owning a home offers additional opportunities for tax savings beyond mortgage-related deductions:
Home Office Deduction
If you use part of your home exclusively for business purposes, you may qualify for a home office deduction. This can include a portion of your mortgage interest, property taxes, and utilities based on the percentage of your home used as an office.Energy-Efficient Home Improvements
Installing energy-efficient upgrades like solar panels or energy-efficient windows can qualify you for federal tax credits. The specifics vary depending on the improvement, so keep receipts and consult tax credit guidelines.Capital Gains Exclusion
When you sell your primary residence, you may exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from your taxable income, provided you’ve lived in the home for at least two of the last five years.
Homeownership provides more than just a place to live; it’s also a valuable financial tool. By taking advantage of mortgage-related tax deductions and other homeowner tax benefits, you can significantly reduce your tax liability. Always consult a tax professional to ensure you’re maximizing your savings and staying compliant with tax laws.