Your home provides many tax benefits—from the time you buy the property right on through to when you decide to sell. However, the Tax Cuts and Jobs Act (TCJA), the massive tax reform law passed by Congress in 2017, placed limits on some of these benefits for the years 2018 through 2025. Here's an overview of these important deductions.
If you itemize your personal deductions, interest that you pay on your mortgage is tax deductible, within limits.
If you purchased your home on or before December 15, 2017, you may deduct mortgage interest payments on up to $1 million in loans used to buy, build, or improve a main home and a second home.
If you purchased your home after December 15, 2017, the limits imposed by the TCJA apply: You may deduct the interest on only $750,000 of home acquisition debt. The $750,000 loan limit is scheduled to end in 2025. After that, the $1 million limit will return. These numbers are for both single taxpayers and married taxpayers filing jointly. The maximums are halved for married taxpayers filing separately.
Private mortgage insurance (PMI) is often required by the lender when a home purchaser borrows more than 80% of the home's purchase price. PMI usually costs $30 to $70 per month for every $100,000 borrowed. This deduction for these premiums expired at the end of 2017. However, Congress later revived it for 2018 through 2021. It's unclear whether the deduction will be extended into 2022 and later years.
If PMI premiums are tax deductible, the amount of the deduction depends on your income: If your household earnings are over $100,000 per year, the deduction starts to phase out. The phase-out starts at $50,000 per year if you're married but filing separately. You receive no deduction at all if you're earning more than $109,000 per year (or $54,500 per year if married but filing separately).
Learn more from IRS Publication 936, Home Mortgage Interest Deduction.
Your mortgage lender will charge you a variety of fees, one of which is called "points," or sometimes "discount points." These are amounts you choose to pay in exchange for a better interest rate. One point is equal to 1% of the loan principal.
One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage.
Refinanced mortgage points are also deductible, but only over the life of the loan, not all at once. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.
Before 2018, you could deduct the interest on up to $100,000 in home equity loans. You could use the money for any purpose and still get the deduction—for example, homeowners could deduct the interest on home equity loans used to pay off their credit cards or help pay for their children's college education. The TCJA eliminated this special $100,000 home equity loan deduction for 2018 through 2025.
However, the interest you pay on a home equity loan that's used to purchase, build, or improve your main or second home remains deductible. The loan must be secured by your main home or second home. So, for example, you can deduct the interest on a home equity loan you use to add a room to your home or make other improvements. Such a home equity loan counts towards the $750,000 or $1 million mortgage interest deduction loan limit (see #1 above) and the interest is deductible only on loans up to the applicable limit.
One of the most significant changes brought about by the TCJA was to impose a $10,000 annual cap on the itemized deduction for property tax and other state and local taxes, which had never been limited before. From 2018 through 2025, homeowners may deduct a maximum of $10,000 of their total payments for:
This $10,000 limit applies to both single and married taxpayers and is not indexed for inflation.
If your home mortgage lender required you to set up an impound or escrow account, you can't deduct escrow money held for property taxes until the money is actually used to pay them. Also, a city or state property tax refund reduces your federal deduction by a like amount.
If you use a portion of your home exclusively for business purposes, you might be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation. For details, see the book Home Business Tax Deductions: Keep What You Earn, by Stephen Fishman (Nolo).
If you decide to sell your home, you'll be able to reduce your taxable capital gain by the amount of your selling costs. (You might not have to worry about your gain at all if it's low enough to fall within the exclusion described below, but if your profits from the sale might be higher than the exclusion, take a closer look at this section.)
Real estate broker's commissions, title insurance premiums, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees are all considered selling costs.
All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.)
Married taxpayers who file jointly get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks (including home co-owners if they separately qualify) and married taxpayers who file separately get to keep up to $250,000 each, tax free. (For more information, see Avoiding Capital Gains When Selling Your Home: Read the Fine Print.)
A home-buying program called "mortgage credit certificate" (MCC) allows low-income, first-time homebuyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home (the amount of the credit varies by jurisdiction). The maximum credit is $2,000 per year if the certificate credit rate is over 20%. (See IRS Publication 530, Tax Information for Homeowners.)
You must first apply to your state or local government for an actual certificate. This credit is available each year you keep the loan and live in the house purchased with the certificate. The credit is subtracted, dollar for dollar, from the income tax owed. For details and links to state housing agencies, visit the National Council of State Housing Agencies website.
For more information on real estate tax laws, visit www.irs.gov. You'll find basic information for first-time homeowners (IRS Publication 530) and publications about selling your house (IRS Publication 523), business use of your home (Publication 587), and home mortgage interest deductions (Publication 936).