Published Oct. 4th, 2024

Owning a home isn't just about having a place to call your own—it also comes with a variety of financial perks, especially when it comes to taxes. As a homeowner, you can take advantage of deductions and credits that can significantly lower your tax liability each year. From mortgage interest to property taxes, owning property offers several ways to keep more money in your pocket while building long-term wealth. In this blog post, we’ll break down the tax benefits of owning property, explaining everything from the mortgage interest deduction to capital gains tax exemptions.

Mortgage Interest Deduction

One of the most significant tax benefits of owning property is the mortgage interest deduction. Homeowners can deduct the interest paid on their mortgage each year, which can make a noticeable difference in reducing your taxable income. For many people, especially in the early years of a mortgage when the majority of payments go toward interest, this can amount to substantial savings. The current limit allows for deductions on mortgages up to $750,000 for married couples filing jointly, which covers most homeowners. This deduction is a powerful incentive for homeownership and makes buying a home more affordable in the long run.

What makes the mortgage interest deduction even more valuable is its ability to offset higher income. If you're in a higher tax bracket, reducing your taxable income through this deduction can help lower your overall tax burden significantly. It’s important to keep detailed records of your mortgage payments, as you’ll need to provide this information when filing your taxes. The deduction can apply to both your primary residence and a second home, which is great news if you’re considering buying an investment property. At Best Team Realty, we’re always happy to help explain how these deductions work so you can get the most out of your investment.

Property Tax Deduction

Another tax benefit of homeownership is the ability to deduct property taxes. Every year, homeowners pay property taxes to local governments, but the good news is that these payments are often deductible. The deduction limit for state and local property taxes, combined with either sales or income taxes, is capped at $10,000 for those filing jointly. While this might not cover all of your property taxes, it can still help lower your taxable income, giving you a valuable financial break each year. Many homeowners find this deduction to be a significant benefit, particularly in areas where property taxes are higher.

Paying property taxes may seem like a burden, but when you factor in the deduction, it becomes much more manageable. Like the mortgage interest deduction, the property tax deduction reduces the amount of income that can be taxed, saving you money at tax time. It’s important to keep all receipts and documentation related to your property tax payments so you can easily claim this deduction when filing your return. If you own multiple properties, you can deduct the taxes on all of them, up to the federal cap. We encourage our clients to track their payments carefully to maximize this tax benefit.

Capital Gains Tax Exemption

When you sell a home, you may be able to take advantage of the capital gains tax exemption, which can save you thousands of dollars. If you’ve owned and lived in your home for at least two of the last five years, you may be able to exclude up to $250,000 of the profit from your taxes—or up to $500,000 if you’re married and filing jointly. This means that many homeowners can sell their home for a significant profit without paying any taxes on the gain. It’s an excellent benefit for homeowners looking to upgrade or move to a new location without worrying about a large tax bill.

The key to qualifying for the capital gains tax exemption is understanding the residency requirement. You don’t have to live in the house for two consecutive years, but you do need to meet the two-out-of-five rule to qualify. This exemption makes real estate one of the few investments where you can grow your wealth without being heavily taxed on the profit. Even if your profit exceeds the exemption amount, only the excess will be subject to capital gains tax, which is often lower than regular income tax rates. At Best Team Realty, we help our clients understand these rules so they can plan their property transactions strategically.

Deducting Points Paid on a Mortgage

If you’ve paid points to lower your mortgage interest rate, you may be eligible to deduct those points from your taxes. Points, also known as loan origination fees, are essentially pre-paid interest on your mortgage. Typically, these points can be deducted in the year you pay them, or they can be spread out over the life of the loan, depending on your situation. This deduction can be especially beneficial when buying a home, as it provides another way to reduce your taxable income. Whether you deduct the points all at once or over time, it’s worth understanding how this deduction works to maximize your tax savings.

It’s important to note that the deduction for points applies only to the interest portion of your mortgage, so make sure you’re clear on the difference between points and other fees. To qualify, the loan must be used to buy, build, or improve your primary residence, and the points must be customary for the area. If you’ve refinanced your mortgage, you may also be able to deduct points, though the rules differ slightly. As with all deductions, it’s essential to keep good records, including the HUD-1 Settlement Statement or Closing Disclosure that lists the points paid. At Best Team Realty, we often advise our clients on how best to handle these deductions.

Home Office Deduction

If you work from home, you might be able to deduct expenses related to your home office, offering another valuable tax break. The home office deduction applies to homeowners who use part of their residence exclusively and regularly for business purposes. This deduction can cover a portion of expenses like mortgage interest, utilities, repairs, and insurance. It’s a great benefit for freelancers, remote workers, and small business owners, allowing them to lower their taxable income by deducting costs associated with their home office. Even better, you can claim this deduction whether you own your home or rent it.

There are two ways to calculate the home office deduction: the simplified method and the regular method. The simplified method allows you to deduct $5 per square foot of home office space, up to 300 square feet. The regular method requires you to calculate the actual expenses related to your home office and the percentage of your home used for business purposes. While the simplified method is easier, the regular method often yields a larger deduction. We recommend talking to a tax professional to see which option is best for you.

Energy-Efficient Home Improvements

Making energy-efficient upgrades to your home doesn’t just lower your utility bills—it can also reduce your tax liability. Homeowners who install solar panels, energy-efficient windows, or other eco-friendly improvements may qualify for the federal Residential Energy Efficient Property Credit. This credit allows you to claim a percentage of the cost of these upgrades on your tax return. For example, the solar energy credit lets you deduct 30% of the installation cost for solar panels. Not only do these upgrades make your home more sustainable, but they also provide a financial incentive through tax savings.

There are also state and local programs that offer additional incentives for energy-efficient home improvements. Depending on where you live, you may be able to combine federal, state, and local credits for even greater savings. Whether you’re planning a big upgrade or smaller energy-saving improvements, it’s worth exploring these tax credits before you begin. These incentives can help offset the cost of going green and improve the long-term value of your home. At Best Team Realty, we encourage our clients to explore these options and make energy-efficient upgrades part of their long-term homeownership strategy.

Deducting Home Improvement Loan Interest

If you’ve taken out a loan to make improvements to your home, the interest on that loan might be deductible. This applies to loans used for "substantial" improvements, such as remodeling a kitchen, adding a new roof, or building an addition. Just like with mortgage interest, you can deduct the interest on loans that are used to improve your primary residence or second home. The improvements must add value, prolong the home’s useful life, or adapt the home for new uses. This deduction helps make financing major home improvements more affordable.

To qualify, the loan must be secured by the property, and the funds must be used specifically for improvements, not maintenance or repairs. It’s also important to keep detailed records of how the loan was used and what improvements were made. Whether you’ve taken out a home equity loan, home equity line of credit (HELOC), or other types of secured loans, this deduction can provide a helpful tax break. At Best Team Realty, we help our clients navigate these deductions, ensuring they’re taking full advantage of the tax benefits that come with homeownership.

Owning property offers a wide range of tax benefits that can help reduce your annual tax burden while also building long-term wealth. From mortgage interest deductions to capital gains tax exemptions, these financial perks make homeownership an even smarter investment. At Best Team Realty, we’re here to help you navigate the complexities of real estate and make the most of your home’s tax advantages. If you have any questions or are ready to explore buying or selling property, give us a call at (917) 797-4500. We’re here to guide you every step of the way!