Tax Advantages of Owning a Home

Person Holding a Piggy Bank and Tiny Home

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While owning a home has widely been considered the American dream and one of the best ways to build long-term personal wealth, the tax benefits of buying and owning a home are often overlooked. There are various different tax benefits available to homeowners that are not available to renters. These tax benefits typically save homeowners thousands of dollars per year in federal income tax liability.

While there are many tax incentives available to taxpayers, owning a home is the greatest tax benefit of all.

Deduct Mortgage Interest

The first tax benefit is that homeowners can deduct mortgage interest from their tax statements. This is an enormous tax benefit as mortgage interest tends to be the most significant cost in any homeowner’s housing payment.

For example, a person with a $300,000 mortgage at six percent interest will pay $1,500 per month or $18,000 per year in mortgage interest. In this instance, 100 percent of the $18,000 would be tax-deductible. Depending on a homeowner’s tax bracket, which ranges from 25 percent to 33 percent, this could lead to an additional $4,500 to $6,000 on the homeowner’s tax return.

However, as a mortgage gets paid down over time, less and less of the homeowner’s payment will go towards interest. Therefore, the mortgage interest tax benefit will decrease over the course of the mortgage.

Deduct Property Taxes

Homeowners can deduct real estate and property taxes that they pay on their homes.

Depending on the location of the home, real estate taxes can be quite expensive and can cost over two percent of the home’s value. Since home values generally appreciate over time, the amount owed on property taxes will also increase.

For instance, a person who owns a $300,000 home could expect to spend $6,000 per year on real estate taxes. Depending on their tax bracket, this could lead to an additional $1,500 to $2,000 on their tax return.

Homebuyer Tax Credit

To encourage new homebuyers to purchase a home, the federal government has issued a first-time homebuyer’s tax credit.

This tax credit will give a first-time homebuyer credit of up to 10 percent of the purchase price, which maxes out at $8,000. This tax credit will be received by the purchaser on the first tax return they receive following the home purchase.

Energy Efficiency Tax Credit

Another tax credit for homeowners comes from improving their homes with energy-efficient additions. Many homeowners will qualify by installing energy-efficient windows, doors, or appliances. These credits often end up covering the vast majority of the expense that the homeowner incurs, which essentially makes the additions quite inexpensive.

These energy-efficient additions will also decrease their utility bills and increase the value of their homes.

Allow for Itemization of Other Deductions

When a homeowner gets a deduction for interest and property taxes, they are now able to itemize other expenses. Most non-homeowners are not able to benefit from various tax deductions that are available to them. This is because all taxpayers are given a standard deduction of about $5,000. Each taxpayer then has the choice of either taking the standard deduction or itemizing.

If a taxpayer has deductions of less than $5,000. then itemizing deductions is not worthwhile. On the other hand, taxpayers who are homeowners most likely will have at least $5,000 of deductions due to interest and taxes. These homeowners are then able to deduct other items including student loan interest, donations to charity, and possibly sales tax paid.

Joshua Williams

Joshua Williams

Joshua is a freelance writer with years of experience blogging about business and finance, and a whole host of other things too. When he's not writing, he enjoys camping with his dog, a golden retriever named Oakley.