9 Tax Breaks That Can Make Owning a Home More Affordable

Person dressed like Statue of Liberty holding sign that says, "It's tax time."

The IRS provides numerous tax breaks to homeowners. | Photo by Joe Raedle/Getty Images

Ben Franklin claimed that “nothing is certain except for death and taxes.” And every year around this time we’re reminded of its unfortunate truth. But let’s change the negative perspective and look at it with the glass half full: If taxes are inevitable, then so are tax breaks.

Pluses and minuses of taxes can be compared to home ownership — the joys ebb and flow. On one hand, it feels great to be one rung higher on the American-dream ladder. But the increased responsibility and costly home repairs can be a mood killer. Sure, it’s a blast hosting a dinner party or building a dynamite basement bar for football games. But the monthly mortgage fees and property taxes add up quickly.

Luckily, there’s a silver lining that appears every February. The IRS gives us a list of individual tax breaks that make owning a home more affordable. (No. 2 applies to everyone.) The fine print on deductions can get pretty lengthy, so we’ve filtered out the jargon and summarized the most common tax breaks for homeowners.

9. Mortgage interest

hands holding a piggy bank and a tiny model home

You typically can deduct interest you pay on your mortgage. | Thinkstock

Mortgage interest is anything you pay on a loan for your home. If you own a home (or second home), you can usually deduct the interest you pay on your mortgage. Examples of these loans could be:

  • A mortgage to buy your home
  • A second mortgage
  • A line of credit
  • A home equity loan

Mortgage loan deductions are not applicable for any third, fourth, or even fifth home. Also, there are limits to these deductions — $1 million to be exact — or $500,000 if married but filing separately.

8. Property taxes

image of the word "taxpayer" in a dictionary

You can claim your personal property taxes as a deduction. | iStock.com/PamWalker68

Property tax, or real estate tax, is one of the most common and straightforward tax breaks for homeowners. Whether you live in Hawaii with a real estate tax rate of .27% or New Jersey with an astronomically high rate of 2.35%, you can deduct the property taxes you paid for the year. Simply include this on IRS Form 1040. Bear in mind this applies solely to properties for personal use, not rental or business properties.

Want to know whether it’s worth it to claim this deduction every year? Wallet Hub calculated that on a $179,000 home (the average price of a home in 2015) you could pay as little as $487 in annual taxes in Hawaii or $4,189 in New Jersey. That’s a good chunk of change for a deduction.

7. First-time homebuyers

man on ladder fixes home's siding

If you’re a first-time homebuyer you might be able to withdraw from your IRA without penalty. | iStock.com

Uncle Sam allows first-time homebuyers to bend the IRA rules a bit to help you fulfill your home-owning dreams. In fact, you can withdraw up to $10,000 from your traditional or Roth IRA without penalty to help with the purchase of your new home. The only stipulation is the money withdrawn must be used toward buying the home, building and rebuilding, or settlement costs within 120 days.

Even better, the IRS’ definition of “first-time homebuyer” is more broad than you might think. You qualify if you or your spouse did not own a home at any time during the past two years.

6. Selling your home

home for sale sign outside of a house

Selling a home and moving qualifies you for new deductions. | David McNew/Getty Images

If you’ve sold a home and moved to another location, you qualify for several new and (somewhat) exciting deductions. Taxpayers can keep up to $250,000 ($500,000 if married, but filing separately) in capital gains, courtesy of Uncle Sam. However, the IRS deems any profit made above that amount deductible.

To be eligible for moving expenses relating to your sale, you must meet three criteria:

  • You moved at least 50 miles from your old home or job location.
  • The move date must relate closely to the start of your new position.
  • You meet certain time test requirements in the new position.

Time tests vary for those who are self-employed, but the minimum time worked must be at least 39 weeks during the first 12 months. Expenses, such as lodging, transportation, and storage, are all tax deductible if you meet these qualifications.

It’s also worth noting that members of the Armed Forces are not subject to these time parameters if your move relates to a military order.

5. Owning a second property

"house for rent" sign

Know the deduction rules if you have a rental property. | iStock.com

Thinking about purchasing a vacation home or income property? Jean Folger from Investopedia says there are many tax benefits to owning a second property for either personal or rental use. If you use your second home for personal use, deductions, such as mortgage interest, property taxes, and home office, are still applicable.

If the second property generates rental income, the rules are a bit different depending on how often you use it as the homeowner. You can deduct rental expenses, such as insurance premiums and fees paid to property managers, only if your personal use was more than 14 days or 10% of the total days rented.

4. Home improvement updates

actors from TV show Home Improvement

Did you act like the guys from Home Improvement and renovate your home this year? | ABC

Did you remodel the kitchen or install a new HVAC system this year? Keep track of capital improvements, or improvements that increase your home’s value, as they come in handy when you go to sell the home. If your home sells for more than you paid for it, that extra money can be considered taxable income at capital gains rates (note the $250,000 or $500,000 exclusion).

But before you go all Bob the Builder on your home, know that general home repairs are those deemed necessary for your home to stay in good condition. So no, you can’t deduct the cost of fixing a leak or patching a roof.

3. Energy credits

Solar panel on a roof

Adding solar panels to your home could result in a tax break. | iStock.com

Speaking of updates, the government also likes to reward taxpayers who make energy-efficient improvements to their homes. In fact, the IRS offers a credit of 30% for taxpayer expenditures that include solar hot water heaters, small wind energy, and geothermal heat pumps. Think of it as saving the planet and padding your wallet at the same time — a win-win for us all.

2. A home office

man sitting on couch working

Your home office might qualify for a deduction. | iStock.com

These days, freelancing and working remotely is more than just a pipe dream for some Americans. Almost a third of the population works from home, according to Nerd Wallet. Luckily, the IRS lets you deduct certain expenses related to your in-home business, including rent, utilities, and repairs.

Not every home office is eligible, though. Nerd Wallet says your home office must be your primary work space, and the spot must not serve dual purpose in your home, such as an office/guest room.

After deciding on eligibility, choose either the simplified or regular method to determine your deductions. Rather than painstakingly recording and calculating your expenditures, try simplifying things by using a standard deduction of $5 per square foot of home used for business (with a maximum of 300 square feet).

1. Home equity loans

photo illustration of tax forms

You might be able to deduct home equity loan interest. | Scott Olson/Getty Images

Similar to the mortgage interest breaks discussed earlier, homeowners can also receive a tax break on home equity loan interest. Did you take out a loan to consolidate debt, make home repairs, or buy a car? Maybe you needed a better solution to pay your college tuition. As long as that debt, the car, or your schooling is less than $100,000, you’re good to go. Note that this deduction only applies to first and second homes.

The waters can get a little murky when diving into the nitty-gritty of homeowner tax deductions. If you find yourself lost in the sea of IRS stipulations, consider contacting a tax professional who will ensure accurate filing and the biggest return. Whether you file on your own or hire a pro, make sure it gets done correctly. Appreciating a big tax return feels a whole lot sweeter when sitting on the back porch of your own home rather than in the audit hot seat.

Follow Lauren on Twitter @la_hamer.

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