Tax Benefits of Owning a Home: How Much You Could be Saving
Even though it is a huge life accomplishment, buying a home is only the beginning of a whole new standard of financial planning. There are many ways you’ll spend money — on bills, maintenance and home improvements — but are there ways to save money as well?
Learn: 3 Ways Smart People Save Money When Filing Their Taxes
Whether you are buying or selling your home, you may be surprised at some of the tax benefits you can get and how much money you could be saving.
6 Tax Benefits of Owning a Home
Everyone likes a tax loophole. However, some real estate tax benefits are just there for the taking. Though many tax credits vary based on such factors as mortgage payment amount or taxable income, here are six tax benefits every homeowner should know.
- Moving expenses
- Home office deduction
- Mortgage interest
- Tax credits
- Real estate taxes
- Home sale
1. Moving Expenses
It is said that after losing a job or getting married, moving is one of the most stressful life events you can go through. If you are part of the armed forces and do have to move, it is good to know you can save some money when it comes to tax season. The deductions don’t cover anything the military has paid for, but moving expenses over the amount they reimbursed can be deducted.
- Travel: Lodging or gas mileage you paid for while moving from your old home to your new one could be deducted.
- Transportation: Moving vans or other forms of item storage and shipping could be deducted.
2. Home Office Deduction
With remote work becoming more and more the new norm, it is good to know that if you are an employee who works form home, you are eligible for the home office tax deduction. This deduction covers small business owners and self-employed people. If you work a majority of the time from your primary residence, here are some common deductions:
- Home mortgage interest
- Mortgage insurance premiums
- Mortgage interest deduction
- Real estate taxes
- Security system
3. Mortgage Interest
According to Forbes, the average APR for a 30-year fixed mortgage is 6.43% and the average for a 15-year fixed mortgage is 5.74% as of Feb. 1, 2023. With rates this high, any savings are welcome.
The good news is that you can deduct the interest paid on your mortgage if your mortgage debt is between $250,000 and $750,000. Any proceeds you save must be put towards building or sustainably improving your home, and the mortgage must be secured by your home to qualify for this deduction.
4. Tax Credits
The best bang for your buck is definitely when you start racking up tax credits. For example, if you get a $1,000 tax credit, you essentially owe $1,000 less on your taxes — it’s the amount of the deduction multiplied by your marginal tax rate, about a one-to-one ratio. This deduction is maximized when you itemize.
5. Real Estate Taxes
State property taxes and local income taxes can be deducted up to $10,000 for singles annually, or $5,000 if married and filing separately. This limit either applies to property taxes plus state and local income taxes or property taxes plus state sales tax, but not both.
These real estate taxes would be a deduction you make under sales taxes and state and local taxes.
6. Home Sale
If you have lived in the home you are selling for at least two of the last five years, you’ll get a large percentage of the profit off your sale tax-free thanks to the capital gains tax exclusion. This tax benefit states you don’t have to pay taxes on the first $250,000 of profit from selling your home if you’re single, or $500,000 if you’re married.
Exemptions such as these let you keep more of your money than a regular capital gains deduction would. With this in mind, make sure you save receipts for any home renovations, improvements or maintenance. Any money you have spent could be added to the base value of your house.
How Do Home Tax Deductions Work?
You’re not alone in dreading tax season. Every year comes with its own challenges on deciding how much you owe or will get back. Here are some general rules to keep in mind when figuring out how much you can save on your taxes.
- Itemized deductions vs. Standard deductions: By itemizing your deductions instead of going with the standard deduction, you could save money if the itemized deductions are higher. Any excess of itemized deductions over standard deductions is what you save money on, so make sure to calculate the difference.
- Filing status: How you file and your income both affect the amount of money you save on tax benefits for owning a home. For example, a married couple buying a home would see lower savings overall than a single person with one income buying at the same price.
Sample Homeowner Deductions Based on Itemized Deduction of $40,000
|Filing Status and Standard Deduction||Itemized Deduction||Possible Tax Benefit Difference|
|Single or married filing individually: $12,950||$40,000||$27,050|
|Married filing jointly: $25,900||$40,000||$14,100|
|Head of household: $19,400||$40,000||$20,600|
You should always be sure to take advantage of any tax break or benefit you can. Saving money in any area of your financial planning goes a long way in the long term.
Other ways you could possibly see tax deductions include home equity loan interest, energy efficiency home renovations, or if you have made medically necessary home improvements.
- What are the tax advantages of owning a home?
- Here are a few tax advantages of owning a home:
- – Mortgage interest
- – Tax credits
- – Real estate taxes
- – Energy efficiency
- How much will I save in taxes if I buy a house?
- The money you save in taxes after buying a home is called property tax deduction. It allows you to reduce your taxable income by up to $10,000 – or $5,000 if married and filing separately.
- This benefits the deductible property taxes, state and local income taxes and sales taxes that you pay.
- Does owning a home give you a bigger tax return?
- Yes – building equity begins with buying a home, which is an investment compared to just paying rent. You can get many tax benefits from owning a home.
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- Forbes Advisor. 2023. "Compare Current Mortgage Rates."
- TurboTax. "Tax Bracket Calculator 2022."
- Rocket Mortgage. 2023. "8 Tax Deductions For Homeowners: Your Breaks And Benefits."
- TurboTax. 2022. "The Home Office Deduction."
- Internal Revenue Service. 2022. "Publication 936 (2022), Home Mortgage Interest Deduction."
- Internal Revenue Service. 2022. "Home Mortgage Interest Deduction."
- Congress.gov. "H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018."