Owning a Home Has Tax Advantages But There Are Limits

It's true that owning a home instead of renting can result in extra deductions at tax time. The cost of ownership is reduced by any tax savings that you are eligible for — but they may not be as much as you expect.

Here's the story if you're a first-time homeowner or thinking about buying or "moving up."

Home Ownership Write-Offs Versus Renting

As far as the IRS is concerned, the cost of renting a personal residence is generally a nondeductible personal expense. (An exception is if you're self-employed and use part of a rented home for business purposes, such as a deductible home office.)

In contrast, the tax law allows you to write off home-ownership expenses as itemized deductions. However, the new Tax Cuts and Jobs Act cut back your deduction privileges for 2018-2025. Under the rules for those years, you can generally claim an itemized deduction for:

• Interest on up to $750,000 of mortgage debt used to acquire or improve a first or second residence ($375,000 if you use married filing separate status).
• State and local property taxes on as many personal residences as you own, subject to a $10,000 combined limit for state and local property taxes and state and local income taxes ($5,000 if you use married filing separate status).
  

The Standard Deduction Factor

‍If you've been claiming the standard deduction on your tax return, buying a home may not generate the extra write-offs you were hoping for. Why? The standard deduction is a tax-law "freebie." You don't need any expenses to claim it. For 2024, the standard deduction amounts are:

• $29,200 if you're married and file jointly.
  
• $21,900 for head of household..
• $14,600 if you file as a single person.
  

If your itemized write-offs for the year add up to less than the standard deduction, you simply forgo itemizing and claim the standard deduction.

Most individuals claim the standard deduction until they buy a home. Then, thanks to mortgage interest and property taxes, they have enough write-offs to come out ahead by itemizing.

However, homebuyers should know that, since they already benefit from the standard deduction, only the incremental amount of deductions from itemizing (the excess of total itemized deductions over the standard deduction) provides any actual tax benefit.

Here's a scenario to help you figure out how much tax savings you can actually reap from becoming a homeowner. ‍

Example: Let's say you're married and will claim the 2024 joint-filer standard deduction amount of $29,200 if you don't buy a home. On the other hand, if you do buy, you'll be able to claim itemized deductions for your mortgage interest of $25,000 and property taxes of $5,000.

But there are other itemized deductions. Say you also pay $4,000 of state income taxes and donate $1,000 to charity. If you itemize, you can write off those amounts too (and others you are entitled to). In this example, your itemized write-offs would total $35,000 ($25,000 plus $5,000 plus $4,000 plus $1,000 equals $35,000).

If you're in the 24% federal income tax bracket, you might think buying a home would cut your tax bill by $8,400 ($35,000 times 24% equals $8,400). That is not the case, since you already had substantial tax savings from the standard deduction.

In fact, home ownership would only reduce your taxable income by $5,800. That's the difference between the $35,000 of itemized write-offs you could claim if you buy and the $29,200 standard deduction you could claim without buying. So your actual federal income tax savings would be only $1,392 ($5,800 times 24% equals $1,392). While that's a meaningful tax reduction, keep in mind it may be diminished by the higher cost of home ownership.

Key Point: If you're already itemizing before buying a home (or are close to itemizing), the additional write-offs from mortgage interest and property taxes will reduce your taxable income dollar for dollar (or nearly so). So you'll collect approximately the tax savings that you would expect. But if you're not close to itemizing, beware of the standard deduction factor (otherwise, you could face an unpleasant surprise at tax time).

Conclusion

‍There are home ownership tax angles that some buyers may not understand. Overall, owning a home usually works out to be a tax-saving proposition. And if you eventually sell for a big gain down the road, the tax results can be much better if you're able to take advantage of the home sale gain exclusion privilege. It allows a qualified married couple to avoid paying federal income tax on up to $500,000 of home-sale profit ($250,000 for a qualified single filer).