8 Federal Income Tax Breaks for Homeowners

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Happy homeowner
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Buying and maintaining a home is expensive — and the cost just keeps climbing. Fortunately, Uncle Sam offers several tax breaks that can put more money back in a homeowner’s pocket.

Some of these deductions and credits can only be used by a small slice of homeowners nationwide. But others are available to a wider swath of folks.

Following are federal income tax breaks for homeowners that can ease the sting of homeownership costs.

1. Residential energy-efficient property credit

If you have made specific energy-efficient improvements to your home, you might qualify for this credit. Renovations that can net you this tax break include adding:

  • Solar electricity
  • Solar water heaters
  • Geothermal heat pumps
  • Small wind turbines

Most of the items we list in this story are tax deductions, but this is a tax credit. Credits are better than deductions because while deductions reduce taxable income, tax credits reduce your tax bill dollar for dollar.

Don’t procrastinate on claiming this credit, as it will not be around forever. Currently, it’s slated to end after 2023, as we reported in “5 Tax Breaks Extended for 2021 — If Not Longer.”

Until then, the credit will be worth:

  • Up to 26% of the cost of eligible property that is put into service by the end of 2022
  • Up to 22% of the cost of eligible property that is put into service in 2023

2. Capital gains exclusion when selling your home

Selling your home opens the door to one of the most generous breaks in the entire U.S. tax code.

Single homeowners who sell and enjoy a capital gain — the profit they earn from the sale — may qualify to exclude up to $250,000 of that gain from their income. That means they won’t owe federal income taxes on that profit.

If you are married and file a joint return with your spouse, the exclusion jumps to $500,000.

There are some rules you must follow to get this break. According to the IRS:

“You’re eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.”

Other rules apply — such as that you generally are ineligible if you excluded the gain from the sale of another home during the two-year period prior to the sale of your current home.

For more, check out this page at the IRS website: IRS Topic No. 701: Sale of Your Home.

3. Exclusion for canceled mortgage debt

Debt forgiveness is a rose that often comes with a thorn — in the form of taxes you owe on the debt that has been canceled. This is because the IRS often considers a canceled debt to be taxable income.

However, passage of the Mortgage Forgiveness Debt Relief Act of 2007 “generally allows taxpayers to exclude income from the discharge of debt on their principal residence,” according to the IRS.

This relief applies to debt reduced through mortgage restructuring and mortgage debt forgiven in connection with a foreclosure. The provision recently was extended through 2025.

4. Deduction for mortgage insurance premiums

For many years, private mortgage insurance — the scourge of homeowners from coast to coast — was not tax-deductible. That changed in 2006, with the passage of the Tax Relief and Health Care Act.

The deduction for mortgage insurance premiums was not intended to be permanent, but recently, it was extended through the 2021 tax year. So, eligible homeowners will have one last chance to claim the deduction when they file their taxes next year — assuming the deduction isn’t extended again.

This break — and all that follow on this list — are what the IRS calls itemized deductions. That means you can take advantage of them only if you itemize your deductions as opposed to taking the standard deduction.

5. Deduction for mortgage interest

Another deduction available only to those who itemize, this tax break allows you to deduct from your taxes the interest you pay on a mortgage loan.

This deduction applies to interest on mortgages for first and second homes and refinanced mortgages. The IRS defines “home” pretty broadly — it even includes a boat house.

6. Deduction for home equity loan interest

Just as you can deduct the interest from a mortgage loan, if you itemize, you also can deduct the interest on a home equity loan or home equity line of credit.

Note, however, that the Tax Cuts and Jobs Act of 2017 narrowed the applicability of this deduction. For the interest to be deductible, the loan must be used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS.

So, you’re out of luck if you use a home equity loan to cover living expenses or pay off debts, for example.

7. Deduction for real estate property taxes

Those who itemize generally can deduct up to $10,000 of their state and local taxes, including real estate property taxes.

Tired of paying high property taxes? Check out “Can I Freeze My Property Taxes?

8. Medical expense deduction for home improvements

One last tax break for those who itemize: Some home improvements can be deducted as medical expenses if they meet certain criteria. According to the IRS:

“You can include in medical expenses amounts you pay for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent.”

Just note that this deduction only applies to the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income. So, even if you itemize, you cannot deduct the full value of your medical expenses.

You can find more details in IRS Publication 502: Medical and Dental Expenses.

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