Tax Breaks and Home Ownership

Updated for Tax Year 2021 / November 15, 2021 04:55 PM


Home ownership brings with it not only many trips to home improvement stores, but also a slew of tax breaks. It's up to you to take full advantage of the write-offs available to you. Here's what you can and can't deduct.


For most people, the biggest home-related deduction is for mortgage interest. How do you figure out how much you've paid in mortgage interest during the year?

You should receive a statement from your lender by the end of January listing the mortgage interest you paid during the previous year. This statement will be labeled Form 1098. It may be attached to, or part of, your monthly mortgage statement, so be sure that you study your January statement carefully to identify any portion that may be labeled as Form 1098. The amount shown as interest paid on Form 1098 is the amount you deduct on your tax return.

Where do I take this deduction?

Fill out Schedule A, Itemized Deductions, to take a deduction for mortgage interest.

If your home loan is with a private party (for example, with the person from whom you bought the home), you may not receive a statement of interest paid even though your mortgage holder should complete one for you. You can still deduct the interest as long as your loan is secured by your home.

Report your lender's name, address and Social Security number on the lines next to Line 8b. (You should have been given this information during the closing of your home purchase). Remember that you have to be liable for repayment of the loan to deduct mortgage interest. If you pay your son's or daughter's mortgage to help them out, for example, you cannot deduct the interest unless you co-signed the loan.

What about late charges?

You can deduct a late payment charge as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.

What about a prepayment penalty?

If you pay off your home mortgage early and you're required to pay a prepayment penalty, you may deduct that penalty as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.

For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.

When you buy a house, you often have to pay points to the lender to get your mortgage. These points can usually be deducted as prepaid interest. Other terms for points are:

You may deduct any points you pay, or points your seller paid on your behalf, in the year in which you pay the points, if you meet all of these requirements:

Some points do not meet these criteria. They may still be deductible, but you have to deduct them over the life of the loan.

"Points" charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees, are not interest and cannot be deducted.

For more details on deducting points, see IRS Topic 504: Home Mortgage Points.

You can deduct annual real estate taxes based on the assessed value of your property by your city or state. Beginning in 2018, the total amount of state and local taxes, including property taxes, that you can deduct is limited to $10,000 per year.

Where do I find how much I've paid in property taxes?

Caution: Don't deduct your payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover tax payments. You should deduct only the actual property tax payments made from the account by your lender during the year.

Where do I take the deduction?

If you itemize, deduct your real estate taxes on Schedule A.

What can't I deduct as property taxes?

You can't deduct charges for services to a specific property or for specific people even if the payments are made to the taxing authority in your area. Examples include:

Through 2021, if you pay mortgage insurance premiums on a qualifying policy issued after 2006, you can generally deduct the premiums as additional mortgage interest. Claim the deduction on Line 8d of Schedule A.

The full deduction can only be taken if your Adjusted Gross Income (AGI) is $100,000 or less ($50,000 if you use married filing separate status). The deduction is phased out for incomes greater than this. The amount of PMI that you pay for the year can be found on Form 1098, which you receive from your mortgage lender.

Mortgage insurance, which protects the lender if you default, should not be confused with more common homeowner’s or fire insurance.

Save receipts and records for all significant improvements you make to your home, such as landscaping, storm windows and fencing. You can't deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This will reduce any potential taxable gain that you may have from the sale of your home.

A number of significant costs of home ownership are not deductible, including:

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