The Tax Benefits of Owning a Home


We, the proud and brave future homeowners of America, already know why we want a house: we want to paint the colors we want; we ache to spend money and time improving a property that actually belongs to us; and we’re way beyond ready to make our own “house rules.” We want the stability of a home we own, and the pride of owning it. And we really, really look forward to the last time we throw rent money down the drain.

But we also know that home ownership is an investment of a different kind, with a complex network of expenses and financial rewards. Equity, that money your home earns for you as its value appreciates, is only one such reward. Tax advantages, something few renters could ever access, are another, but these advantages can be confusing: Once we start deducting home-related expenses from our income tax, we can kiss that easy EZ return goodbye. But the extra effort pays off in credits if we know how to take full advantage of them.

So that’s just what ZipRealty's ZipCode blog aims to do with this installment of our first-time buyers advice series: explicate the tax benefits of buying, and owning, a home.

Mortgage Interest Comes Straight Off the Top

Reality check for new buyers: Much (if not most) of each monthly mortgage payment will go toward interest, not principal. Annoying, yes—until we realize that all of that interest is deductible, and that applies to any type of home: condo, single-family residence, town house, co-op, or mobile home. The only exception to the dollar for dollar credit is homes that cost a million dollars or more. Homeowners with million-dollar mortgages incur limitations on deductible interest, courtesy of the IRS.

Note however, if we have Private Mortgage Insurance (PMI) that helped boost us to 20% down, we most often cannot deduct interest paid to this part of the mortgage.

Paid Down Points? That’s a Possible Tax Write Off Too

Though today’s interest rates continue at record low levels, some buyers may still find advantage in buying down points when they secure their loans. In this case, buyers can take advantage of additional tax credits the same year they paid down the points. But there are conditions. We can write off all the points at one time only if:

  • the loan is to purchase a primary residence
  • payment of points is an established business practice where the loan was purchased
  • the points purchased don’t exceed the “normal” range of allowed discount

Itemizing Expenses

One of the scariest things about owning a home: if something goes awry, we can’t just call the landlord to come fix it. No, from now on the fixing and improving of the property is all on us. On the one hand, that responsibility can be exciting; but on the other hand, it can be expensive.

That’s why homeowners might want to consider itemizing home-related expenses—to recover some of that out-pocket-cash in the form of tax credits.

Here are a few deductibles allowed on your tax form 1040, Schedule A:

  • Property Taxes: A big part of most monthly loan payments covers annual property taxes, and is also an annual deduction as long as we own the home.

Additionally, if this is our first year in the home, we can deduct the portion of that year’s taxes that we paid. That first year’s property tax was split between us and the former owner, based on the time each of us owned the house, when our loan first started. Our share of the property’s annual tax amount is 100% deductible.

Note that every house in every area will be subject to a unique property tax. Your Realtor(r) can help you pull records on any property you're interested in to determine what your property tax will be, keeping in mind that particular state laws, such as California's Prop 13, also affect your tax rate.

  • Home Office Expenses: If we work from home, particularly if we are self employed, many of our business-related expenses we incur within our home can be itemized as deductions. The IRS makes clear what we can (and can’t) deduct and at what percentages of the original expense are explained here:
  • Winterizing/Energy Efficiency Tax Credits: The Obama administration and many state governments have created and/or expanded various tax credits for homeowners who need to, or elect to, improve their home’s efficiency, weatherization, or general state of repair. These are worth studying for all of us, but are too numerous and elaborate for one blog. Check out a current list, here.

cut taxes by owning a home


Sources for Additional Study