11 Real Estate Tax Benefits Homeowners Should Know About 

Peter Chambers

Jul 13, 2023

real estate tax benefits

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If you’re like many Americans, your home represents your biggest investment. It can also be one of your largest sources of real estate tax benefits — if you know what to do. Unfortunately, few people outside paid accountants will advise you on how to save money on April 15th. 

It pays to educate yourself, even if you use a professional preparer. Two heads are better than one, and knowing the basics helps you ask more educated questions at your consultation, possibly resulting in savings. 

What should you include on your 1040 when you prepare it this year? Here are 11 real estate tax benefits homeowners should know about. 

1. Capital Gains Exclusion 

The biggest real estate tax benefit you may get for your home happens at the point of sale. Let’s say you bought your home for $125,000 a few years ago and, thanks to the crazy market, can now sell it for a tidy $299,000. Ordinarily, you’d be responsible for paying taxes on $174,000 of capital gains. 

However, per IRS rules, single individuals can exclude $250,000 from the sale of their primary residence from capital gains tax. The exemption extends to $500,000 for married filing jointly. To qualify, you must pass the following two tests

  • Ownership: You must be the legal owner of the home. 
  • Use: You must have used the home as a primary residence for at least two of the five preceding years. Generally, you must not have excluded the sale of another home during the two years preceding the sale of the current property. 

There are wrinkles, of course. Issues sometimes arise if you partially use the property as a rental. For example, you may have continued to live in the home but leased out half of it to a long-term tenant or created an Airbnb. Your tax professional is always the best person to consult with such intricate questions. 

2. Mortgage Interest Deduction

The mortgage interest deduction is a real estate tax benefit that allows you to deduct the amount you paid toward interest on your primary or second home over the year — if you itemize. That means you’ll have to do some math. The standard deductions for the 2022-2023 tax year are as follows:

  • Single and married filing separately: $13,850. 
  • Married filing jointly: $27,700. 
  • Head of household: $20,800. 

It only makes sense to itemize if the total you can deduct exceeds the standard deduction. For example, say you paid $8,000 in mortgage interest, $1,000 in student loan interest and had $1,000 in medical expenses above the 7.5% exclusion. In that case, your total deductions would only add up to $10,000, less than the single standard deduction of $13,850. You’d stick with the standard. 

Conversely, if you paid $11,000 in mortgage interest, $3,000 in student loan interest and had allowable medical deductions of $4,500, you’d be well above the $13,850 threshold. Itemizing would save you the most money. 

3. State and Local Property Tax Deduction

You can also deduct any amounts paid toward state and local property taxes. However, the law recently changed, limiting the amount you can deduct to $10,000. The amount drops to $5,000 if you are married filing separately. 

Therefore, if this is your only deduction, itemizing it doesn’t make sense. However, many homeowners use this deduction with several others to lower their total tax liability. 

4. Mortgage Points Deduction 

You may be eligible for substantial real estate tax benefits if you bought your home this year and paid points. Points equal the mortgage interest you paid upfront to secure the loan, with each point equivalent to 1% of the total loan amount. 

However, you must meet several criteria to qualify to deduct points in the year of purchase: 

  • It is your primary residence 
  • Charging mortgage points is common in your area
  • The points charged did not exceed the typical points charged for your area
  • You didn’t borrow the money to pay the points: If the lender withholds the points from the loan proceeds, you do not qualify. 
  • The HUD-1 statement clearly states the points paid, and they are shown as a percentage of the mortgage principal. 

5. Mortgage Insurance Deduction 

When you don’t put at least 20% down on a conventional loan, you may need to pay private mortgage insurance. This is also a feature of many FHA loans. 

Although this credit expired in 2022, you can still claim it if amending your 2018 through 2021 taxes. It is subject to an income limitation of $109,000 for 2021. Still, it could save you a few hundred dollars, making it worth reviewing your past returns. 

6. Home Equity Loan Interest 

Did you take out a home equity loan to improve your property? If so, you can often deduct the interest paid toward it the same way as you would deduct typical mortgage interest. To qualify, you must meet the following four tests: 

  • Total loan amount less than $750,000: Your first and second mortgages must not exceed $750,000 or $1,000,000 before 2018. 
  • The home is a qualifying residence: It must be a first or second (vacation) home. 
  • The funds were used to buy, build or improve the home: For example, taking out a second mortgage to build an in-law suite in your backyard or remodel your basement to allow grandma to move in would qualify. 
  • The debt does not exceed the home’s value: The IRS does not let you deduct interest on loans that exceed the value of the collateral. 

7. Medically Necessary Home Improvements 

As Americans age, more and more people decide to do so in place, remaining in the family home. However, they find certain upgrades necessary to make the property accessible as their physical abilities change. Furthermore, one in four adults lives with a disability. 

The IRS allows you to deduct medically necessary home improvements made to support you, your spouse or your dependents. However, please remember that you must itemize to claim this deduction, and the expenses must exceed the 7.5% medical expense limitation. That means if your gross income is $100,000, you can only deduct expenses in excess of $7,500. 

8. Home Office Deductions 

Are you one of the many who isn’t returning to the office or has a shiny new hybrid schedule? If so, you may qualify to deduct expenses associated with your home office as real estate tax benefits. 

However, many taxpayers run into trouble with this deduction. To qualify, you must exclusively and regularly use a part of your home or a separate structure on your property for work purposes. That means occasionally taking work home to complete at the kitchen table doesn’t cut it. 

However, this deduction is one that even renters can avail themselves of, so it’s worthy noting it. You can use a simplified method, using a percentage of your total allowable home expenses, limited to 300 square feet or $1,500 maximum.  You can also use the regular method where you deduct only those costs attributable to home office use, often preferable if your work location is a separate property like a shed or apartment above a detached garage. 

9. Residential Energy Credits

Did you install solar panels to go green? What about upgrading to newer Energy Star appliances? You could be eligible for a sweet credit. 

Unlike deductions, which only decrease your taxable income, credits can increase your refund. Congress recently extended the clean energy credits through 2034, so plan accordingly and take advantage if you have upcoming renovations you need to make. Why not reduce your carbon footprint and reap the rewards? 

10. Rental Real Estate Deductions 

The next two deductions briefly cover deductions you may be eligible for as a homeowner if you rent part of your property. Please be advised that converting your property to rental purposes can cause tax time issues if you later sell and try to claim the capital gains exemption. It’s best to consult a qualified accountant about your situation before making any decisions that could cost you big time come April 15. 

However, homeowners who lease part of their home as a long-term rental or Airbnb can deduct the costs associated with that enterprise. These expenses include but are not limited to:

  • Mortgage interest
  • Property tax
  • Operating expenses
  • Repairs 
  • Ordinary and necessary expenses: Including advertising, taxes, maintenance, utilities and insurance

11. Depreciation 

Finally, homeowners who use their property as a rental can claim depreciation. Depreciation is an accounting method that allocates the cost of an asset over its useful life. Basically, it allows you to spread out the cost of the original purchase for multiple years, as the full deduction would otherwise be disallowed in the year it occurred. 

Calculating depreciation requires some tricky math calculations. However, fortunately, most of today’s tax preparation software handles the hard work for you. All you must do is answer a few questions. 

Real Estate Tax Benefits Homeowners Should Know About 

Your home is often your biggest asset. Could it be your greatest source of real estate tax benefits? It’s possible. 

The US tax code allows multiple deductions and credits as benefits for real estate owners. Educate yourself about real estate tax benefits and save money come April 15. 

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