We are routinely contacted by prospective clients who are seeking tax advice because they are in the process of purchasing a home for the first time. While we welcome such calls and are happy when they lead to new clients, buying a home really doesn’t have much impact on most tax returns.
This is because most deductions that might come with owning a home are reported on Schedule A, the form used when a taxpayer chooses to itemize instead of taking the standard deduction. With the standard deduction being so high ($14,600 for singles, $29,200 for married couples on the 2024 return) most folks no longer itemize. However, for those that do, there are some things that should be included on Schedule A:
Mortgage interest: Mortgage companies issue form 1098 at year-end with information on the interest paid during the year. You can deduct the interest paid on the first $750,000 of indebtedness; for homes purchased prior to December 16, 2017, the limit rises to one million dollars of mortgage debt. Mortgage interest paid on a property used as a second home can also be deducted, subject to the debt limits listed above.
Property taxes: Property taxes paid on all homes can be deducted, subject to a cap of $10,000 for all state and local taxes combined.
Points and PMI: Points paid on a primary residence are generally deducted in the year of purchase. Private Mortgage Insurance (PMI) premiums used to be deductible but are no longer allowed to be written off.
Home equity loan interest: While interest on home equity loans used to be fully deductible, tax law changes in 2018 put some restrictions on this popular deduction. Only interest on loans providing funds to buy, build, or improve your residence can be written off. This means a home equity loan taken out to replace a damaged roof or to enclose a deck to make a sunroom count, but a loan to purchase a new car does not. For taxpayers who take money out when refinancing, the math can be a bit tricky, so you may want to seek a tax professional’s help if you took a cash-out refinance.
Taxpayers who do not benefit from itemizing would not be able to take advantage of any of the above deductions for their primary residence or a second home. However, rental properties come with a different set of rules, so mortgage interest, property tax, insurance, repairs and maintenance, and other related expenses are potentially deductible on a Schedule E for rental properties.
Likewise, a self-employed taxpayer who follows the rules for a home office can potentially deduct related expenses on their Schedule C. There are many rules governing home offices, chief of which is that the home office portion of the residence be used regularly and exclusively for business. More details about home office deductions can be found here.
Whether you live in a mansion or something more modest, home ownership does offer some limited tax benefits. We’re happy to discuss your housing situation with you to make sure you are maximizing any tax breaks for which you qualify.
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