6 Tax Deductions for Homeowners (And Other Savings)

2. Home equity loan or HELOC interest

If you’ve taken out a home equity loan or home equity line of credit (HELOC), the interest you pay on these loans may be deductible, but only if the funds were used to substantially improve your home. For instance, if you used a home equity loan to remodel your kitchen, you can likely deduct the interest.

However, if the loan was used for other purposes, like paying off credit card debt, you typically cannot deduct the interest.

3. Discount points

Discount points are upfront fees paid to lower your mortgage’s interest rate. The IRS allows you to deduct the cost of these points in the year you bought your home if the points are directly related to your primary residence and meet specific IRS guidelines.

For example, if you paid $3,000 in discount points when closing on your mortgage, you could deduct this cost in the year you purchased the home, provided you meet the IRS’s qualifications. If the points were paid for refinancing, the deduction is usually spread out over the life of the loan.

4. Property taxes

As a homeowner, you can deduct the property taxes you pay on your home — up to a limit of $10,000 per year ($5,000 if married and filing separately). This limit includes both state and local taxes, known as SALT (State and Local Tax) deductions.

For example, if you paid $7,000 in property taxes and $4,000 in state income taxes, your deduction would be capped at $10,000. If your total SALT taxes exceed the $10,000 cap, you can only deduct up to that amount.

5. Medically necessary home improvements

Certain home improvements made for medical reasons may qualify as a tax deduction. These improvements must be necessary for the care of a disabled or ill person in the home, and the cost must apply to permanent improvements that increase the value of your property.

For example, if you install ramps, modify bathrooms, or add handrails for accessibility, these costs may be deductible. However, if the improvements add value to your home, you’ll need to subtract the increase in value from the total cost to determine the deduction amount.

Here are some examples of deductible improvements if they may be medically required:

• Wheelchair exit and entrance ramps
• Handrails, support bars, or doorknobs
• Altered stairways, doorways, or landings
• Modified kitchen cabinets or equipment
• Accessible electrical outlets or fixtures
• Warning or alert systems
• Grading the ground to provide access

6. Home office expenses

If you use part of your home exclusively for work and your work-from-home setup qualifies under IRS rules, you may be able to deduct certain home office expenses. This deduction applies to self-employed individuals and small business owners, but not to employees working remotely for an employer.

You can deduct a portion of your home-related expenses, such as utilities, rent, and repairs, based on the square footage of your home office. Alternatively, the IRS offers a simplified deduction method of $5 per square foot, up to a maximum of 300 square feet.

To qualify for this deduction, you must use part of your home on a regular basis as one of the following:

• Exclusively as your principal place of business for your trade or business
• Exclusively as a place where you meet or deal with your patients, clients, or customers in the normal course of your trade or business
• A separate structure that is not attached to your home, used exclusively in connection with your trade or business
• For storage of inventory or product samples used in your trade or business of selling products at retail or wholesale, so long as your home is the sole fixed location of such trade or business
• For rental use
• As a daycare facility

Tax exemptions and credits

In addition to deductions, homeowners may qualify for certain tax exemptions and credits that reduce their overall tax liability. Unlike deductions, which reduce your taxable income, credits directly reduce the amount of tax you owe.

One common credit is the Energy Efficient Home Improvement Credit. This allows you to claim 30% of the costs of new, qualified clean energy upgrades for a tax credit — up to $3,200. Beginning Jan. 1, 2023, the credit applies to:

• Qualified energy efficiency improvements installed during the year
• Residential energy property expenses
• Home energy audits

Another potential benefit is the capital gains exclusion. When you sell your primary residence, you can exclude up to $250,000 of profit ($500,000 if married and filing jointly) from capital gains taxes, as long as you’ve lived in the home for at least two of the past five years.

What homeowners cannot deduct from taxes

While there are many tax breaks available to homeowners, there are also some expenses that you cannot deduct, no matter how necessary they seem. The IRS provides a list of non-deductible expenses:

• Insurance including fire and comprehensive coverage and title insurance
• The amount applied to reduce the principal of the mortgage
• Wages paid to domestic help
• Depreciation of your property
• The cost of utilities, such as gas, electricity, or water
• Most settlement or closing costs
• Forfeited deposits, down payments or earnest money
• Internet or Wi-Fi system or service
• Homeowners’ association fees, condominium association fees or common charges
• Ordinary home repairs

Keep records for your future home sale

As a homeowner, keeping detailed records of your home expenses is essential for your yearly tax returns — and when you eventually sell your home. Improvements you’ve made over the years can increase your home’s tax basis, reducing your potential capital gains tax. Keep receipts and documentation for any major renovations or energy-efficient upgrades.

When selling your home, having these records will make it easier to calculate any taxable gains and take advantage of exclusions or adjustments. By staying organized, you can ensure that you benefit from all available tax breaks and make the most of your investment.

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