Mortgage Interest Deduction

New homeowners can deduct interest paid on up to $750,000 of mortgage debt. To qualify,

  • The mortgage must be secured by the home
  • You must itemize your deductions using Schedule A, and
  • The home must be a “qualified home.” This can be either your primary residence or a second home.


However, be aware that if you rent the second home out to others for part of the year, the IRS imposes a minimum owner occupancy requirement to qualify for the deduction. This requirement entails staying in the home for more than 14 days or more than 10% of the number of days that you rent the home out, whichever is longer. Additionally, if you designate part of the home as a home office or rent it out as an independent living unit, then this will reduce the amount of mortgage interest you can deduct.


Mortgage Points

Mortgage points are charges that lenders impose to reduce a loan’s interest rate. As a form of prepaid interest, they are deductible along with regular mortgage interest paid during the year. However, any additional points the lender may charge, which could cover things like appraisal, inspection, title, or attorney fees, are not tax deductible.


Property Tax Deduction

The allows taxpayers to deduct specified state and local taxes using Schedule A. This includes property taxes as well as either sales or income taxes imposed by state and local governments. This combined deduction is limited to a total of $10,000 in tax liability per year.


Energy Efficient Home Improvement Credit

If you make certain improvement to your home to increase its energy efficiency, a portion of the related expenses may be eligible for a federal tax credit. Examples of qualifying expenditures include home energy audits, upgrades to windows and doors, improved insulation, and replacement of water heaters and HVAC equipment with more energy-efficient alternatives.


You can claim up to 30% of these expenses under the energy efficient home improvement credit with the following annual limitations:

  • Maximum of $1,200 for total energy property costs, including limits on specific items:
    • $250 per exterior door or $500 total for all exterior doors
    • $600 total for windows
    • $600 per qualifying HVAC unit (other than those listed below)
    • $150 for home energy audit
  • $2,000 for qualified heat pumps, biomass stoves, or biomass boilers
  • $3,200 maximum total credit


You do not need to itemize deductions to claim the energy efficient home improvement credit. Simply report the expenditures on Form 5695 and include it with your tax return. Bear in mind, however, that the credit is nonrefundable, which means it will not reduce your federal tax below zero. Any portion of the credit that is not used in the current year may not be carried forward to future years.


Making the Most of Tax Deductions

To take full advantage of the tax incentives available to homeowners, you must itemize your tax deductions. However, this only makes financial sense if your itemized deductions exceed the standard deduction for the year. Be sure to maximize your deductions by tracking all your deductible expenses and reporting them on Schedule A. In addition to the homeowners’ deductions described above, examples of deductible expenses include certain large medical expenses, charitable donations, casualty and theft losses in connection with a federally declared disaster, gambling losses, and federal estate taxes among others.


Additionally, you may be able to increase your tax deductions by prepaying property taxes that are due in the following year. Note, however, that the same does not apply to prepaying mortgage interest except in the case of points, as described above.


Additional Tax Benefits When You Sell

If you sell your home, all or part of the profits from the sale could be excluded from capital gains tax. To qualify for this benefit, you must have used the home as your primary residence for at least two of the five years preceding the sale. Married joint filers can exclude up to $500,00 in gains, and single filers can exclude up to $250,000 from capital gains tax obligations.


The relative costs of renting and buying a home are always in flux with changing interest rates, home values, and tax incentives. As a result, it’s not always simple to determine which is the most advantageous choice. To gain insight into how purchasing a home will impact your taxes and overall financial situation, consult with experienced financial and tax advisors.


As a full-service tax and accounting firm, Rosenberg Chesnov Advisors LLC, a Stable Rock Company, can provide the insight and guidance you need to make informed homebuying decisions. For more important tax and financial tips, subscribe to our blog.