Tax Benefits for Homeowners

What tax deductions, programs, and housing allowances are available to you as a homeowner? Let’s explore a few options that the IRS makes available.

If you have a mortgage, you may deduct the interest paid, within allowed limits. You can also deduct state and local real estate taxes (subject to a $10,000 limit). Interest paid on home equity loans may also be deducted so long as the loan was used for home improvements or to buy or build another house.

Certain qualified improvements to make a house more energy efficient or to adapt a house for medical needs may be tax deductible.

If you qualify for a Mortgage Credit Certificate from a state or local government, you are eligible for a tax credit; this reduces the amount of your tax liability. You may also deduct part of the interest paid on your mortgage, though less than if you took the standard mortgage interest deduction.

If you are ordained clergy or are serving in the military and receive a nontaxable housing allowance, you may still deduct your full real estate taxes and mortgage interest payments. These are not reduced by the amount of housing allowance you receive.

All these deductions have to be itemized on IRS Form 1040.

Exceptions

There are many expenses that you cannot deduct, such as:

• Title insurance
• Most settlement or closing costs
• Fire and comprehensive insurance coverage
• Payments applied to reduce mortgage principal
• Forfeited deposits, down payments, or earnest money (money you put down to demonstrate your seriousness about buying a home)
• Depreciation
• Wages paid to domestic help
• Payments for utilities (gas, electricity, water, and internet)
• Homeowners association fees, condominium association fees, or common charges
• Home repairs

The details

You should keep full and complete records so that you can correctly itemize on Form 1040. Save the purchase contract and settlement papers from when you bought the property. Retain any receipts, canceled checks, evidence of home improvements, and similar documents so they are available to the IRS. You should always keep documents for three years after you file your taxes; however, documents related to home improvements should be retained for three years after you sell your house. Be aware that some states require documents to be kept for even longer.

If you have questions, IRS.gov has resources to help you. You might also want to consult with a tax preparer or CPA.