There are two big tax benefits you get when owning a home: You can deduct the mortgage interest that you pay each year and you can deduct at least a portion of your property taxes.
Here are some of the tax deductions available to homeowners and home buyers who are itemizing their taxes.
Mortgage interest deduction
If you financed a home purchase in 2022 — or increased the size of your mortgage with a cash-out refinance — it could be worthwhile to itemize to capture the mortgage interest deduction. The only way to tell is to add up all of your deductions to see if they amount to more than the standard deduction.
Those who itemize can deduct mortgage interest on up to $750,000 of mortgage debt by filing IRS form 1040 with a Schedule A to itemize deductions. (The mortgage deduction is half that — $375,000 — for married taxpayers who file separately. For mortgage debt incurred before December 16, 2017, the limit is $1 million or $500,000 if married and filing separately, according to the IRS.)
Deductions for a second home or vacation home
Mortgage interest from a second home can be deducted provided that the total mortgage interest deduction for your primary home and second/vacation home doesn’t exceed the $750,000 limit.
The IRS defines a qualified home as a main or second home that can be a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities. A main home is the place where you ordinarily live most of the time.
Property taxes — the annual tax you pay based on the value of your property — are also tax deductible up to a point. You can generally deduct up to $10,000 in combined state and local income, sales and property taxes for all properties owned. If you’re married and filing separately, you and your spouse can each deduct $5,000.
Home equity loan
A home equity loan is a second mortgage on a home that gives homeowners funds they can use for any reason, including large expenses or to consolidate higher-interest rate debt on other loans or credit cards. If you used the money from the loan to pay for home improvements or if the combined total of your first mortgage balance, and your home equity loan doesn’t exceed $750,000, interest on your second mortgage may be tax-deductible for homeowners.
Mortgage points and origination fees
Any origination fees and/or discount points you paid in association with a new mortgage in 2022 are considered prepaid interest and may be deducted if you itemize your deductions. Your closing documents will show what you paid in origination fees and points.
Mortgage insurance on your primary home
You may be able to deduct private mortgage insurance premiums (PMI) as an itemized deduction.
Households with adjusted gross incomes (AIG) of $100,000 or less are allowed to deduct 100% of their mortgage insurance premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, and is not available to households with earnings over $109,000.
Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their mortgage insurance premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500.
Capital gains from selling a home
If you sold your main home and made a profit, you may be able to exclude that profit from your taxable income.
Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple filing jointly) as long as you have owned the home and lived in it for a minimum of two years. The two years do not have to be consecutive. As long as you live in the house as your principal residence for at least 24 months in the five years prior to the sale, the deduction applies.
Generally, you can claim the exclusion only once every two years. Some exceptions do apply.
If you lived in your home less than 24 months, you may be able to exclude a portion of the gain. Exceptions are allowed if you sold your house because the location of your job changed, because of health concerns or for some other unforeseen circumstance.