Home LoansMortgage

8 Tax Benefits of Buying a Home in 2021

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

You may not realize there are several tax benefits of buying a home, if homeownership is on your goal list. Two major incentives are the mortgage interest and property tax deductions — both may help you save on the thousands of dollars you pay annually to your lender and local government.

What is a tax deduction, and how does it work?

A tax deduction is a benefit that helps taxpayers reduce their taxable income. A reduction in taxable income also shrinks your tax bill.

When filing your taxes, you have the option to either take a standard deduction, which is a fixed amount that varies by tax filing status, or itemize the deductions for which you qualify. Tax deductions shouldn’t be confused with tax credits, which essentially provide discounts on your tax bill.

1. Mortgage interest deduction

The mortgage interest deduction — one of the main tax benefits for homeowners — allows you to deduct the interest you pay on your mortgage to buy, build or improve your main or second home.

You can deduct the interest paid on up to $750,000 of mortgage debt if you’re an individual taxpayer or a married couple filing a joint tax return. For married couples filing separately, the limit is $375,000. If you bought your home on or before Dec. 15, 2017, the mortgage interest deduction limit is $1 million for single filers and married couples filing jointly, and $500,000 for married couples filing separately.

The same deduction limits apply to the interest paid on home equity loans and home equity lines of credit (HELOCs). If you’re a single taxpayer and the combined amount of your first mortgage and HELOC is less than $750,000, for example, you’re allowed to deduct the full amount of interest paid on both loans — if they were both used to build, buy or make improvements to your main or second home.

If the money is used to consolidate debt, cover college costs or fund some other expense, though, you won’t qualify for the deduction. This also includes the funds you receive in a cash-out refinance.

2. Mortgage insurance deduction

If you pay for mortgage insurance as part of your monthly mortgage payment, you may qualify to deduct that expense from your taxable income. Mortgage insurance protects your lender if you can’t repay the loan and go into mortgage default.

Homeowners with an adjusted gross income up to $100,000 (or up to $50,000 if they’re married and filing separately) can deduct their mortgage insurance premiums. There’s a reduced deduction amount for incomes up to $109,000 (or up to $54,500 for those married filing separately); if your income is above these amounts, you wouldn’t qualify to deduct your mortgage insurance premiums.

The mortgage insurance premiums deduction is available through the 2020 tax year.

3. Mortgage points deduction

Another one of the tax benefits of buying a home is the ability to deduct mortgage points you paid upfront when closing on your home purchase. One mortgage point, also called a discount point, is equal to 1% of your loan amount.

Generally speaking, you’ll deduct points over the life of your loan rather than in the year you paid them. However, there is an exception to this rule if you meet a series of tests, as outlined by the IRS. The tests include:

  • Having a mortgage that is secured by your main home.
  • Paying for points that didn’t cost more than what is generally charged locally.
  • Paying for points that weren’t paid in place of other closing costs, such as appraisal or title fees.

Visit the IRS website for the entire list of tests you’ll need to pass to fully deduct mortgage points in the year you paid them.

4. SALT deduction

There’s a deduction for state and local taxes (SALT), which includes property taxes. The deductible amount is capped at $10,000 for single taxpayers and married couples filing taxes jointly. The deduction limit is $5,000 for married couples filing separately.

The cap on the SALT deduction may not benefit homeowners in states with high property taxes, such as:

  • California
  • Connecticut
  • Illinois
  • Massachusetts
  • New Jersey
  • New York

How the deduction works: If you’re a homeowner who now pays $7,000 in state income taxes but your property taxes are $6,000, you’ll only be able to deduct $3,000 of your total property tax bill.

5. Tax-free profits on your home sale

One of the tax benefits of owning a home doesn’t kick in until after you sell your home — tax-free profits.

If you sell your house at a profit, your capital gains are tax-free up to $250,000 if you’re single, and up to $500,000 if you’re married filing jointly. You must have lived in and used the home as your primary residence for at least two out of the five years before the sale date to qualify for this tax perk.

6. Residential energy credit

There’s an eco-friendly tax break for homeowners, known as the residential energy-efficient property credit. The incentive applies to energy improvements made to a home, which might include installing solar panels and wind turbines, among other energy-efficient upgrades.

The residential energy credit ranges from 22% to 30% of the improvement cost, depending on what year the energy upgrades were made, and expires Dec. 31, 2021.

7. Home office deduction

If you work from home or have a home-based business, you may qualify for the home office deduction, which applies to both homeowners and renters. To qualify, a portion of your home (a bedroom-turned-office, for example) must be used exclusively and regularly for business purposes. You must also show that your home is the main location used to conduct your business.

There are two ways to claim the deduction:

  • The regular method, which involves determining the percentage of your home being used for business activities.
  • The simplified option, which allows you to deduct $5 per square foot, up to 300 square feet, for the business use of your home.

8. Standard deduction

While considering the available tax deductions for homeowners, it’s important to look closely at the standard deduction allowed by the IRS. If you decide to take the standard deduction, that means you agree to deduct a set amount of money from your taxable income. Taking the standard deduction also means you can’t itemize your deductions, and vice versa.

Here are the standard deduction amounts for each taxpayer category for tax years 2020 and 2021:

Tax filing status  2020  2021 
Single  $12,400 $12,550
Married filing separately  $12,400 $12,550
Head of household  $18,650 $18,800
Married filing jointly  $24,800 $25,100

If the deductions you qualify for as a homeowner are higher than the standard deduction amount for your tax filing status, then it may make more sense for you to itemize your deductions — otherwise, the standard deduction may work in your favor. Consult your tax professional for more specific guidance.

 

Today's Mortgage Rates

  • 2.41%
  • 2.18%
  • 2.60%
Calculate Payment
Advertising Disclosures Terms & Conditions apply. NMLS#1136

Featured Articles