Will Buying a House Give You a Tax Break?

Buying a house can affect many aspects of your life, including your tax bill. That's because investing in a home doesn't just mean taking on a new mortgage payment. Your purchase could also provide tax benefits starting in the tax year you acquired the property.

This guide can also help you see some of the tax breaks you may be entitled to. Read on to learn more.

How you’ll get a tax break for buying a house

Potential tax savings can come in the form of deductions that reduce taxable income or tax credits that could reduce your tax liability on a dollar-for-dollar basis.

A $1,000 deduction could, for example, reduce your taxable income from $40,000 to $39,000, and you'd save money by avoiding taxes on $1,000 of income. A $1,000 tax credit, on the other hand, could take a $5,000 tax bill down to $4,000, so it may offer greater savings.

Most tax breaks for homeowners are tax deductions, but some tax credits may soon be available to specific home buyers. When you're figuring out how to file taxes, you'll want to claim both the credits and deductions your home entitles you to in order to get the most savings.

Here are some ways homeownership could help you reduce your tax bill.

Mortgage interest

Mortgage interest is the interest you pay on your home loan. When you make a monthly mortgage payment, some of the money is allocated to paying down your principal balance while the rest covers the interest accrued on your loan.

The specific amount of interest you pay typically changes each month. Yet the interest on your loan is tax-deductible with mortgages up to $750,000 for married joint filers (or up to $1 million if you borrowed before December 16, 2017). For married separate filers, interest is deductible on up to $375,000 in debt. However, it’s important to note that you can only claim this savings if you itemize. That means you deduct for specific expenses rather than claiming the standard deduction.

For 2023, the standard deduction is $27,700 for married joint filers and $13,850 for single taxpayers or married separate filers. In 2024, it is increasing to $29,200 for married joint filers and $14,600 for single taxpayers or married separate filers. 

Unless the total value of your itemized deductions exceeds that amount, you will save more by claiming the standard deduction — which would mean you couldn't deduct your mortgage interest.

Mortgage insurance premiums

Borrowers may be required to pay mortgage insurance premiums (MIPs) if they don't make a large enough down payment on their home.

The rules for when private mortgage insurance is required vary depending on the lender and loan type. With most conventional loans, borrowers have to pay mortgage insurance if they make less than a 20% down payment. This is required even with many of the best mortgage lenders because it protects against lender losses in case of foreclosure.

Real estate taxes

Many U.S. cities and towns charge local property taxes or real estate taxes. If you pay these taxes, you might be able to deduct the amount from your federal taxable income. This is true for primary and secondary homes, although special rules apply if you rent out your properties.

As with mortgage interest, you must itemize in order to deduct real estate taxes. And joint filers are subject to a combined $10,000 deduction for all state and local taxes (or $5,000 for married separate filers). That includes real estate taxes, as well as state income or sales tax.

Mortgage points

Mortgage points may be paid when you close on your home loan. They reduce the value of interest. For example, one point may cost 1.00% of the loan amount and reduce your interest rate by 0.25%.

Points are considered prepaid interest, and you can deduct the full amount of points only if you meet certain criteria. Your home loan must be $750,000 or under (or $375,000 or less for married separate filers), and all of the following requirements must be met:

• The loan must have been used to purchase your principal residence.
• Paying points must be a common, established business practice in the area where you borrowed.
• You didn't pay more points than customarily charged.
• You report income in the year you receive it and deduct expenses in the year you paid them.
• You didn't pay points in place of other charges usually listed separately on mortgage settlement statements, such as appraisal or inspection fees.
• Your points are based on a percentage of the loan balance.
• Your settlement statement clearly shows the points charged.
• You itemize on your taxes in the year you paid the points.

You also have the option to spread out the points over the life of the loan and deduct them over time. This could be a good choice if you don't itemize your deductions in the year you pay points, but you itemize in future years.

Profits from home sale

When you sell assets at a profit, you are subject to taxes on the gains. This is true even if the asset you sell is your home. But there are special rules for how gains on a primary residence are treated.

Specifically, you can exclude up to $250,000 in gains as an individual (or up to $500,000 for married joint filers), provided you meet both an ownership and use test. These tests require that:

• You owned the home for at least two of the past five years
• You used the home as your main home for at least two of the past five years

These tests can be met using two different two-year periods, and the key is aggregate time — you don't necessarily have to live in the house for two straight years to qualify.

If you sell your home after at least two years of ownership, you will also be taxed at the long-term capital gains tax rate, which is typically lower than your standard rate. But if you sell before two years are up, you would be taxed at the short-term rate, which is your standard income tax rate.

Home office expenses

It is possible to claim a home office deduction if you have a part of your home that is set up exclusively for business purposes.

However, this deduction can only be claimed if you’re self-employed, not an employee of another company. And the office space must also be the principal place of your business, which means you mostly work from the office at home.

The deduction can be calculated using a simplified calculation, which allows you to deduct up to $5 per square foot of your home used for business purposes, up to a maximum of 300 square feet. Or the regular method of calculating the deduction is based on what percentage of your home is devoted to business use. You can deduct a percentage of most home expenses based on a percentage of the home used for business purposes if you use the regular method.

Home energy tax credit

Qualifying energy-efficient improvements could also entitle a homeowner to tax credits, at least during the 2022 tax year. For example, equipment tax credits are valued at up to 10% of the cost of certain improvements up to a maximum of $500. This includes air-source heat pumps and biomass stoves, among other energy-efficient items.

The IRS has comprehensive details about residential energy property costs that can entitle taxpayers to credits. It also includes specifications that energy-efficient products must meet in order for homeowners to become eligible for tax credits.

What isn't tax-deductible when you buy a house?

While many expenses related to homeownership are tax-deductible, some aren't. Non-deductible expenses include:

• Mortgage principal payments
• Moving costs (in most cases, though exceptions can apply for active-duty military and other special cases)
• Homeowners association fees for non-rental property
• Utility bills, such as water, cable, sewer, and electric
• Homeowners insurance for non-rental property
• Furniture and household items

FAQs

The bottom line

There are a number of tax incentives for homeowners built into the federal income tax system, including tax breaks for energy-efficient home improvements. Taxpayers might also get favorable capital gains tax treatments if they profit on their home and may be able to deduct property taxes as part of their local and state tax deduction. And, of course, a home mortgage interest deduction could also help some homeowners reduce their taxable income.

The specific tax credits you might be eligible for as a homeowner will depend on whether you claim itemized deductions and if your home is your primary residence. If you want to know exactly how your home will affect your tax refund — and whether itemizing makes sense or a particular write-off is available to you — your best option is to talk with a tax professional.