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IF YOU OWN a home or are planning to buy one, there are a few things you need to know from the tax standpoint that could save you money:
1. Mortgage Interest
If you have a mortgage, you can typically deduct the interest you pay on the loan up to $750,000 ($1,000,000 if taken before December 16, 2017) but only if you itemize your deductions (schedule A)
You can also deduct points you paid if you itemize. Many people miss deducting points on their tax returns when they purchase a house, but you have to meet some criteria like:
In general, points to get a new mortgage or to refinance an existing mortgage are deducted ratably over the term of the loan.
Note that the deductible points not included on Form 1098 (the mortgage interest form) should be entered on Schedule A (Form 1040), Itemized Deductions, line 8c “Points not reported to you on Form 1098.”
2. Property taxes
Property taxes can be deducted on your tax return if you itemize deductions. The total amount of taxes (including state and local income taxes) is capped at $40,400 for 2026.
This cap is temporary and will increase by 1% annually through 2029 before reverting to $10,000 in 2030. If you make between $500k to $600k of modified adjusted gross income, the $40.4k deduction is reduced by 30% for each dollar you make. At $600k MAGI, the deduction drops to $10k, potentially raising marginal tax rates to 45.5% (!) for singles due to “SALT torpedo” if you are in the $500-600k range.
If you are at that range, it’s recommended to mitigate this by lowering AGI/MAGI by maximizing pre-tax 401(k)/403(b), HSA, FSA contributions, timing RSU sales, tax loss harvesting, or deferring income/accelerating expenses for business owners.
3. Improvements
Improvements are significant enhancements made to your home that increase its value.
Many people overpay on taxes when they ultimately sell their house because they don’t keep track of these improvements.
Here are some examples provided by the IRS:
> Putting an addition on your home
> Replacing an entire roof
> Paving your driveway
> Installing central air conditioning
> Rewiring your home
> Building a new deck
> Kitchen upgrades
> Lawn sprinkler system
> New siding
> Built in appliances
> Fireplace
Now, these costs aren’t deducted, but they are added to your home’s cost basis. This could lead to lower capital gains taxes when you sell your property (more on this later).
Repairs, on the other hand, don’t impact your basis and don’t affect your taxes (e.g. repairing a broken fixture, patching cracks, etc)
You will need to document every improvement, as this can help you save money on taxes.
Keep your receipts and invoices (upload them to Google Drive) and record the dates and descriptions of the work done.
Taxes when selling your house
When you sell your house, here’s the formula:
Selling price
> Selling expenses (like realtor fees)
> Adjusted cost basis (how much you purchased it for + all these capital improvements I talked about above + any closing costs you paid when you acquired the home (legal fees, recording, survey, stamp taxed, title insurance)
= Gain/Loss
You will need to pay capital gains tax if there is a gain, but, luckily there is a gain exclusion (Section 121 exclusion) that can also help you save on taxes:
4. Gain exclusion
If you sell your primary residence, you may be able to exclude up to $250,000 ($500,000 for married) of the gain from taxes if you meet some conditions.
> Ownership (must have owned the home for at least 24 months within the 5 years prior to sale. For married couples only one spouse needs to meet this requirement)
> Residence (you must have used the home as your main residence for at least 24 non-consecutive months during the 5 years before the sale. For married couples both spouses must meet requirements.
> Look-back (you must not have claimed the exclusion on another home within the 2 years before this sale)
Now, many people don’t know this but there is actually a partial exemption.
1. Work related move (i.e. you started a new job at least 50 miles farther from home)
2. Health related move (you moved to obtain, provide, or facilitate care for yourself or a family member)
3. Unforeseeable events (casualty, divorce, death, financial difficulty)
4. Special circumstances
So, instead of claiming the full exclusion, you can exclude a prorated portion of the $250,000/$500,000 limit based on how long you owned and lived in the home.
By the way, you can rent out a home for 2 years and still qualify for the exemption, as long as you lived there for the required period before selling (many people do this).
5. Tax example selling a home
You bought a home for $200,000 (including all other costs) in 2018. You built a new deck, new roof and siding totaling $50,000. You now sold your home for $500,000. You are single. Selling costs are $20,000 (agent fees, etc)
Sale price: $500,000
-$20,000 of selling costs
(200,000 + 50,000) = -$250,000 (adjusted basis)
Total Gain = 230,000
Exclusion = $250,000.
Total taxes paid = $0.
But what if you didn’t keep track of all your renovation costs like new siding or a deck? You would’ve had to pay taxes on $20,000 of capital gains!
Overall, knowing how these things work can literally save you thousands in taxes. Do you have any tips with homeownership? Share some in the comments!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
Thank you for this article. It is beyond timely for me. Recently widowed, I sold my paid-off home last year and moved to a different state to be closer to my grandchildren. I was determined to pay cash for my new home. I had always believed that a mortgage in retirement was a very bad thing, Homes in my new area are older and much more expensive. Property taxes are higher. This area remains a seller’s market. I’ve made cash offers on a couple of homes but then “choked” out of fear that I will run out of money. I still want to travel. My husband and I had worked hard to get to the “end point” of a paid-off home to live a worry free retirement. But then lo and behold, he died and all the old rules flew out the window. Maybe a mortgage in retirement is not such a bad thing if it preserves liquidity, allows me to buy the home I want, and helps to reduce my overall tax burden. Life goes on….