How Does Owning a Home Affect Taxes Now?

Albert Einstein once lamented, "The hardest thing in the world to understand is the income tax." If you buy, sell, finance or own real estate, it gets even harder.

Yet there's no reason to pay more than the minimum, and the Internal Revenue Code actually gives property owners lots of tax breaks for buying a home or owning one.

According to Art Ford, a certified public accountant in Boston, "For many homeowners, real estate taxes and mortgage interest are by far some of their biggest federal income tax deductions. If I pay $1,500 a month in mortgage interest, that's potentially an $18,000-a-year deduction."

For some homeowners, especially those with small mortgage balances who live in places with low state income and property tax areas, the good news is that the new standard deductions ($13,850 if filing single or married filing separately, $27,700 if married filing jointly) may mean that you no longer need to itemize deductions for the purpose of lowering your taxable income. These larger deductions may already exceed the amount of income-lowering that itemization would bring, and may simplify the filing process for you. For others, the changes aren't as beneficial.

10 tax questions and answers for homeowners

In order to help keep their tax bill as low as possible, current homeowners and aspiring first-time homebuyers should know the impacts that the 2017 Tax Cuts and Jobs Act (TCJA) changes continue to have on their tax returns. Here are some commonly asked questions and answers about taxes and homeownership:

1. Can I still deduct mortgage interest?

One of the most popular and lucrative tax benefits for homeowners has always been the deduction for mortgage interest. Fortunately, although TCJA did modify it, the deduction wasn't eliminated. As well, high home prices and higher mortgage rates in 2023 mean that new homeowners are likely paying a lot more interest than has been the case in some years, so more homeowners will likely be looking to take advantage of the mortgage interest deduction when filing their 2023 tax returns.

As with all things tax-related, however, the changes to the tax code did add certain complications.

For homes purchased after December 15, 2017, mortgage interest on total principal of as much as $750,000 on qualified residence loans can be deducted. For married taxpayers filing a separate return or single homeowners, the new principal limit is $375,000.

For homes owned before December 16, 2017, the older limits are "grandfathered in" -- that is, carried forward, so the maximum principal balance on which interest can be deducted remains $1,000,000 -- and marrieds filing separately can deduct $500,000 each.

Any mortgage interest you pay will be reported to on the Form 1098 your lender or servicer will send to you. You can also get working figures of the principal and interest portions of your mortgage payment by using a mortgage calculator.

2. Is home equity loan mortgage interest still deductible?

In a word, no. Or, probably not, at least for some of the most common uses. One of the biggest tax changes that came from the TCJA was the elimination of the separate provision that allowed Americans to deduct interest on home equity debt of as much as $100,000 no matter what the money was used for. Starting in tax year 2018 and continuing forward, the change in the tax law strictly limits instances where interest on home equity loans or lines of credit can be deducted.

The deductibility of home equity interest is now only allowed where the funds have been used to "buy, build or substantially improve" a qualified residence. Interest deductibility is still limited to not more than $100,000 in second lien debt, and is subject to the total mortgage debt limits discussed in item number 1 above. If a home equity loan or line of credit was used for any other purpose, such as to cover personal expenses like paying off credit card debts, the interest paid is no longer deductible. If you do use the funds to "buy, build or substantially improve" your home and will be looking to deduct interest you paid, the onus is on you to keep good records of the expenses you covered with those funds should your return be audited at some future date.

These conditions also apply to any money you might have extracted from your home in a cash-out refinance. Interest paid on proceeds used to "buy, build or substantially improve" remain deductible up; interest paid on those funds used for other reasons (debt consolidation, etc.) are not. Remember to keep good records of any such expenditures.

If you had a home equity loan or line of credit, and interest you paid will be reported to you by the lender in Form 1098, just as it would be for your first mortgage.

3. Are mortgage closing costs tax deductible?

In general, the only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. Certain other settlement or mortgage closing costs aren't deductible right away, but rather are added to the "basis" value of your home and may provide some tax offset should you sell your home.

"Basis" is the value of your home for the purposes of calculating future capital gains taxes. Essentially, when you sell your home, your gain (profit) or loss for tax purposes is determined by subtracting its basis (original calculated value when you bought it) plus the cost of any improvements from the sales price (plus sales expenses, such as real estate commissions). The larger your basis, the smaller the gap to the current value of the home. In turn, this reduces the profit on which taxes are levied.

Mortgage-related items you'll pay that can be added to the basis include things like abstract fees (abstract of title fees), legal fees (including fees for the title search and preparation of the sales contract and deed), recording fees, owner's title insurance and more.

See IRS Publication 530, "Tax Information for Homeowners" and look for "Settlement or closing costs" for more details.

4. Is mortgage insurance tax deductible?

If you put down less than 20 percent when you purchased your home, chances are you're paying mortgage insurance. The deductibility of Private Mortgage Insurance (PMI) premiums has been an on-again, off-again affair for years; unfortunately for homeowners in 2023, it's still "off", according to IRS Publication 936.

Deductions for PMI (or MIP for FHA-backed loans) are not part of the tax code, but in the years after the financial crisis were routinely re-authorized by Congress as parts of other bills and "extended" to cover the most recent tax year. However, that wasn't the case for tax year 2022 or 2023, but this may change in the future, of course.

The official IRS code covering the deductibility of mortgage interest (which, if again deductible, will include PMI premiums) can be seen in Publication 936. Since the deductibility of PMI and MIP could be reauthorized at any time, it's a good idea to check both the IRS website and Publication 936 before you file your returns.

Even when PMI is deductible, there are caveats and limitations. For example, in tax year 2021 (the last year where PMI premiums could be deducted), the PMI policy's mortgage had to be originated after 2006; as well, the deduction for PMI premiums was reduced once the homeowner's Adjusted Gross Income (AGI) exceeded $100,000 ($50,000 if married filing separately) and the deduction was completely eliminated with an AGI above $109,000 ($54,400 married filing separately). When they are available, deductions for mortgage insurance premiums are treated exactly the same as mortgage interest.

Of course, with the standard deduction raised significantly as a part of the Tax Cuts and Jobs Act of 2017 (TCJA), many homeowners who might have formerly itemized their deductions in order to deduct the mortgage interest they paid now simply take the standard deduction, which simplifies filing returns.

If you should file an itemized return on Schedule A, and mortgage insurance premiums later become retroactively deductible for tax year 2023, you might consider filing an amended tax return, to capture the MI deduction for 2023, if it's worth it in your situation.

5. Are mortgage points paid in a home purchase deductible?

The IRS has a points deductibility flowchart and discussion that you can use to see if points are fully deductible. This is covered as part of Publication 936, Home Mortgage Interest Deduction on the IRS website. In general, you must have paid points to build, buy or improve your primary residence in order to deduct the entire amount in the year they were paid. Otherwise, they may still be deducted but on a prorated basis.

Are discount points I paid to refinance deducted differently?

This deduction is often overlooked, but it could be worthwhile. When you pay points on a refinance, they have to be prorated.

For example, if you paid $3,000 in points on a 30-year mortgage you refinanced previously, you can deduct $100 a year for 30 years. But if you refinanced again in 2023 and have prorated points that have not yet been deducted -- for example, you are 10 years into a 30-year loan and have only deducted $1,000 of $3,000 in points paid -- you can deduct the remaining $2,000 in the year you refinance.

If you paid points for a mortgage in 2023, these will also be reported to you on Form 1098.

6. Can I deduct my property taxes?

In addition to tax law limitations pertaining to mortgage interest deductions, there are also limits to your property tax deduction. Since tax year 2018, your total state and local tax (SALT) deduction has been maxed out at $10,000; prior to 2018, the amount of the SALT deduction was not limited.

In a low-or no-income tax state, on in a place where your property tax bill isn't particularly high, the $10,000 cap may not impact you. However, if you're buying a home in New York (or other high-tax state), you may find that a portion of your property tax bill is no longer deductible from your income.

Which state and local taxes are and aren't deductible are discussed in Tax Topic 503.

7. Will I owe capital gains tax if I sold my home in 2023?

Until 1997, once you hit the age of 55, you had the one-time option of excluding up to $125,000 of gain on the sale of your home providing it was your primary residence.

Now, anyone, regardless of age, can exclude up to $250,000 of gain (or $500,000 for a married couple filing jointly) on the sale of a home. This means most people may pay no tax unless they lived in their home for less than 2 out of the last 5 years.

It's important to remember that capital gains are just that: gains. These are increases in value above the original purchase price plus any improvements (so-called "basis", as above). For example, if you bought a home to live in for $250,000, made $100,000 in improvements to it and sold it for $600,000 just three years after you bought it, your "basis" cost would be $350,000, so the amount of capital gain you would have earned from your home sale in this case would be $250,000, and you wouldn't owe any tax on the amount.

That said, IRS Publication 523 notes that you generally can't deduct repairs or maintenance, only "improvements" that are designed to increase your home's value. Unfortunately, the rules for what's a "repair" versus an "improvement" are pretty vague.

For instance, the IRS says fixing a broken windowpane is a repair, but replacing it as part of a project to swap out all of your home's windows is an improvement. So, consult with a tax professional or read IRS Publication 523 for further guidance.

If you still have taxable profits on your home after factoring in all of the above, you'll report your gains on a Schedule D, Capital Gains and Losses. Note: Capital losses on primary residences are not deductible.

8. Should I itemize home-related deductions or use the standard deduction?

To get an idea as to whether you should still itemize or consider switching to using the standard deduction, start with your tax returns for 2022. If your situation is similar in 2023, and your total itemized deductions in 2022 were below the new standard deduction, you probably no longer need to itemize to get the biggest deduction. However, if your total deductions still exceed the new standard deduction, you'll want to consider the new rules for deduction, including any SALT limitations that may impact you.

By way of example, for 2017, the standard deduction for a married couple was $12,700. Using this deduction, a married couple that paid $15,000 in mortgage interest and also had $3,000 in charitable contributions and $6,000 in state and local taxes would have been able to reduce their taxable income by an additional $11,300 by itemizing. For 2018, however, the standard deduction for a married couple was $24,000, so this example couple wouldn't be any better off by itemizing.

For tax year 2023, the threshold for this same married couple has increased to $27,700, so the standard deduction would be greater than total of the itemized deductions. In addition, the standard deduction is increased for taxpayers over 65; for single taxpayers over 65, the amount for 2023 is $15,700, and for married couples filing jointly where one spouse is over 65, the standard deduction is $29,200 ($30,700 if both spouses are aged 65 or older).

Given recent mortgage interest rates, a homebuyer might need a pretty big mortgage and high state and local property taxes to make it worth itemizing. For example, to get to the $27,700 married-filing-jointly standard deduction using mortgage interest alone, a homeowner with a 5% interest rate would need a mortgage amount of about $557,800. Of course, a higher interest rate on the mortgage means it takes a smaller loan to hit that $27,700; for example, a 6.5% interest rate on a 30-year mortgage needs only a $428,350 amount to rack up $27,702 in interest in the loan's first year.

A more typical homeowner with a 4%, $300,000 loan would spend only $13,888 in interest in the first year, and so would have a $13,112 gap to cover using state and local taxes (and any other deductions that can be itemized) just to get to the $27,700 threshold. However, at a rate of 6%, the interest generated would be $20,883, so there would be a smaller amount to cover to make it worth filing an itemized return.

While typically about 30 percent of taxpayers itemized deductions each year before 2017's TCJA, this number has dropped sharply. The Tax Foundation estimated that only 13.7% of filers itemized deductions in 2019, and estimates for tax year 2022 were down to about 8%, so a lot fewer taxpayers need to use the mortgage interest deduction to help lower their federal tax bill

9. What home expenses are tax deductible?

When it comes to home expenses, from a tax standpoint, they're broken down into two categories: the cost of any improvements and the cost of any repairs.

In general, you can deduct the cost of improvements, but you can't deduct the cost of repairs.

There are a number of home improvement expenses you can deduct on your taxes. Most big-ticket items, such as additions to the house, a swimming pool, a new roof or a new central air-conditioning system, are considered tax deductible. Other tax-deductible home expense items include adding an extra water heater, storm windows, an intercom, or a home security system.

When you make home improvements, such as installing central air conditioning, adding a sunroom or replacing the roof, you can't deduct the cost in the year you spend the money. However, if you keep track of those expenditures, they may help you reduce your taxes in the year you sell your home, as these improvements become part of your home's basis.

Unless your property is a rental or investment, you don't get tax breaks for items such as Hazard insurance, Homeowners association (HOA) dues, any principal payments you make, general closing costs like appraisal fees or title insurance or any local assessments to improve your neighborhood.

10. Do deductions phase out as income rises?

The Tax Reform and Jobs Act eliminated through 2025 the income-based phase out of itemized deductions (the so-called "Pease limitation", named for the congressman who introduced the legislation in 1991). Formerly, deductibility was reduced for single filers with adjusted gross incomes above $261,500 and $313,800 for married persons filing jointly and there were other complicated components as well.

The bottom line for homeowner tax changes in tax year 2023

Now several years old, the Tax Cuts and Jobs Act was a game-changer for many homeowners, especially those in states with high state and local property taxes, and for people using home equity as a portion of their day-to-day finances. For many folks, the changes mean that they will no longer need to endure the hassle (and possibly expense) of itemization, simplifying their tax filing process.

Of course, as is always the case with taxes, there are plenty of twists and turns; depending on your situation, you may (or may not) be eligible for additional tax breaks, such as write-offs for a home office if you’re self-employed or those for a second home. It’s always worth consulting a tax professional who can help you understand how using your principal residence and any other properties you may own can affect your tax liability.

Related: Will mortgage debt forgiven in my loan modification be taxed as income?

Keith Gumbinger contributed to and revised this article, as did Craig Berry