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Buying & Selling

Income Tax Benefits of Buying a Home and Having a Mortgage

There are tons of advantages to buying your own home. You never have to worry about the landlord when you want to decorate, your housing costs are relatively stable from year to year and you’re pouring your money into an investment that will grow in value over time — instead of lining your landlord’s pockets. 

But let’s talk specifically about the tax benefits that come along with buying a home and taking on a mortgage. Believe it or not, Uncle Sam is pretty generous when it comes to the tax breaks that are designed to support the American Dream and encourage home ownership. 

If you’ve been hesitant to commit to a mortgage, learning more about these tax benefits and the financial breaks associated with homeownership may help you decide to take the plunge. 

Here are the biggest tax benefits every homeowner should know about:

Mortgage Points Deductions

Mortgage points are a fee that you pay directly to your lender to “buy down” the interest rate over the life of your loan. The lender can also charge points if you have lower credit scores.  Lastly, if you want to waive your escrow account, the lender could charge points.  One “point” costs 1% of your mortgage so that works out to $1,000 for every $100,000 you borrow to buy your home. 

While homeowners generally try to avoid paying points when they can, it isn’t always possible (or wise). Fortunately, the Internal Revenue Service (IRS) permits you to deduct those points from your taxes. You may even be able to deduct the points all at once off your taxes the same year that you buy your home, rather than spreading them out over the life of your own.

Mortgage Interest Deduction

This is one of the most lucrative tax benefits that you get from owning a home, and the one that most homeowners know the best. 

Single homeowners and married couples can deduct the interest they pay each month on up to $750,000 worth of mortgage debt, and married couples filing separately can deduct the interest on up to $375,000 of their mortgage — and that can add up to a significant tax reduction overall.

Even better: You get the same deduction for any interest you pay on a home equity loan or a home equity line of credit (so long as that money was used to buy, build or make improvements on your primary or secondary residence). 

SALT Deductions

You may be wondering about the benefits of a mortgage when it comes to state and local tax (SALT) deductions. Once again, you can itemize your deductions and include your property taxes so that you can increase the overall tax break you get on both your Indiana and local return. 

Currently, that deductible is capped at $10,000 for single taxpayers and married couples filing jointly, and $5,000 for married couples who file separately — but that may change in the near future. There’s pressure on Congress to increase the limit significantly to make it easier on homeowners in states where the property taxes are particularly high.

Home Office Deductions

Many people shifted partly or wholly to remote work in 2020, and there are indications that this may be an ongoing trend for many in upper-level positions or those whose work can easily be done from anywhere. 

The IRS allows you to take a hefty tax break if part of your space is devoted to your occupation and sees regular use. You can opt for a simplified deduction ($5 per square foot of dedicated space, up to $1,500 maximum) without keeping any records, but you may benefit even more by tracking your bills and calculating the full cost of your expenses — and that includes a percentage of your heating and cooling costs, internet service and more.

While the home office deduction applies to both renters and homeowners, a lot of homeowners are taking the opportunity to renovate a room or corner of their home to make it more suitable for their work needs. Those renovations — whether major or minor — can also be used to lower your tax bill come 2022. Just make sure you keep your receipts for every professional you hire or paintbrush you buy as you remodel.

Energy-Efficiency Credits

Through Dec. 31, 2021 you can take a tax credit for numerous energy-efficient upgrades that you make to your home, which can help you lower your tax bill, boost the value of your property and do something good for the environment in one fell swoop. 

You can recoup a percentage of the costs for qualified, energy-efficient items like:

  • Heating and air conditions systems
  • Water heaters 
  • Biomass stoves
  • Insulation
  • Roofing 
  • Windows
  • Doors
  • Skylights 

Exactly how much you can recoup from your expenditures depends on the specific improvements you make and when they were made, although you are limited to an overall maximum lifetime credit of $500. (It’s also significant to note that this credit has been previously extended via an act of Congress — and could be again.)

Ultimately, buying a home is generally one of the best investments you can make for your future. Housing prices continue to rise, but record-low interest rates are making homes more affordable than ever — and owning a home lets you grow equity that can be used to fund your other dreams. If you’ve been itching to explore the available home options out there, it may be time to contact a REALTOR® and get started.


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