Key Takeaways
Energy-efficient upgrades to your home can lead to substantial tax savings.
Using a Home Equity Loan or HELOC to buy, build, or improve your home allows you to deduct interest paid on that loan if you itemize.
The mortgage interest deduction is one of the largest you can take as a homeowner.
1. Mortgage Interest Deduction
If you itemize your taxes, the mortgage interest deduction is one of the largest you can take as a homeowner. Before the Tax Cuts and Jobs Act of 2017, you could deduct up to $1 million ($500,000 if you are married and filing separately) in mortgage interest. Now, the maximum you can claim is $750,000 (or $375,000 if your filing status is married filing separately).
There are some exceptions. If your mortgage was taken out before December 16, 2017, you are grandfathered into the higher previous rate. Additionally, mortgages that predate October 14, 1987, may deduct all interest regardless of the total amount.
2. Mortgage Points
When you obtained your home loan, did you purchase mortgage points (aka discount points) to lower your interest rate? Good news! The IRS considers them to be prepaid interest so you can deduct the cost of the discount points in the year you paid them. One discount point equals 1% of the mortgage amount. Just be sure that the points weren’t for paying the lender’s costs (loan origination points), as these are not tax-deductible.
To deduct your points, you must meet all of the following IRS requirements:
- The mortgage was used to buy or build your primary home.
- The use of points must be a common business practice in your area.
- The points must be a percentage of your mortgage (not lender costs).
- The points paid cannot be excessive for your area.
- Cash accounting must be used on your taxes.
- Funds used to pay the points must not be borrowed from the lender or broker.
- The points can’t be used for property taxes or other stand-alone fees.
- What you paid in points must be itemized on your loan paperwork.
If you’re unable to deduct the points in the year you paid them, you may still be eligible to deduct them over the life of your home loan. Consult with a tax professional to see if you qualify.
3. Home Equity Loan Interest
If you took out a home equity loan or line of credit (HELOC) last year, you may be able to deduct the interest paid if you meet the following requirements:
- You itemize your deductions; and
- The money from your HELOC was used to buy, build, or substantially improve your home.
Remodels, additions, new roofs, and new HVAC units are all examples of “improvements” that would qualify for the deduction. If you used your HELOC to pay off debt or for educational expenses, however, you cannot take this deduction.
It’s also important to note that your HELOC’s interest counts toward your total mortgage interest deduction limit. If you’re over the limit with your primary mortgage, you can’t deduct your HELOC interest, too.
4. Property Tax Deduction
Under the One Big Beautiful Bill Act (OBBBA), the state and local (SALT) tax deduction temporarily increases from $10,000 to $40,000 annually. It’s only available to those with an adjusted gross income (AGI) of $500,000 or lower, and you must itemize. If your filing status is married filing separately, the maximum deduction decreases to $20,000. The limit includes your property taxes and either:
- State and local income taxes; or
- State and local sales taxes.
For example, if your property taxes are $16,000 and your state income taxes are $14,000, you can deduct the entire amount if you’re married and filing jointly and meet the AGI requirement. If you’re filing separately, you may claim the $14,000 in state income taxes, but only $6,000 in property taxes.
The expanded SALT limit only applies to tax years 2025 through 2030. It will revert to the $10,000 cap after 2030.
5. Energy-Efficient Improvements
The Inflation Reduction Act (IRA) of 2022 provides federal tax credits and deductions for taxpayers who make energy-efficient upgrades to their homes. These tax credits were originally scheduled to run through 2032, but new legislation has them ending in 2025. Currently, they provide up to $1,200 annually to help lower the cost of improvements by up to 30%. You may also receive up to $2,000 for buying and installing an eligible heat pump. Examples of qualifying improvements include, but are not limited to:
- Heat pumps
- AC units
- Water heaters (natural gas)
- Insulation
- Doors
- Windows and skylights
Upgraded electrical panels and home energy audits are also covered by the tax credits. If you made multiple improvements, the total tax credit allowed is $3,200. Check with your state for any additional rebate programs offered.
6. Capital Gains
Did you sell your home for a profit last year? If you lived in it for at least two of the last five years before selling, you can exclude up to $500,000 (or $250,000 if you’re single or married filing separately) in profits from your federal income tax return.
Don’t forget to include the costs of home improvements when calculating your cost basis. You should also keep your receipts in case you are audited.
Home Expenses That Aren’t Tax Deductible
Unfortunately, not all home-related expenses are tax-deductible. This includes, but is not limited to:
- Mortgage down payment
- Costs for refinancing a mortgage
- Mortgage insurance
- Payments made toward your mortgage’s loan principal
- Utility expenses (gas, water, electric, etc.)
- Homeowner’s insurance
- Homeowner association fees
- Cleaning and yard maintenance costs
- Depreciation of your home’s value
If you need help determining which tax breaks you are eligible to take as a homeowner or need help filing your tax returns (state and/or federal), reach out to a tax professional. At Tax Defense Network, we offer a free consultation and affordable tax preparation fees. Call 855-476-6920 to speak to one of our tax experts today!