Tax Deductions for Homeowners: Mortgage Interest, Property Taxes, and Closing Costs

If you own a home, you may be eligible for certain tax deductions that can help lower the taxes you owe on your federal income tax return. You may be able to deduct the interest you pay on your mortgage loan and any property taxes you pay on your home. Also, if you closed on a new mortgage last year, you may be able to deduct some of the costs paid at your loan closing.

This article will review a few things you need to know about these tax deductions. Remember, everyone’s tax situation is different, and you may want to consult a tax professional for personalized guidance.

Mortgage Interest Deduction

One of the most significant tax benefits of owning a home is the mortgage interest deduction. This allows you to deduct the interest you pay on your mortgage from your taxable income.

You can deduct the interest you pay on a mortgage loan for your primary residence as well as a second home or vacation home. You can also deduct the interest you pay on a home equity loan or line of credit if the loan was used to buy, build, or improve your home.

. To qualify for this deduction, you must:

• Itemize your deductions: You cannot claim the standard deduction if you want to deduct mortgage interest.
• Have a qualifying mortgage: The mortgage must be used to buy, build, or improve your primary or secondary residence.
• Meet certain limitations: For mortgages taken out after December 15, 2017, the deduction is limited to interest paid on the first $750,000 of the loan. For mortgages taken out before that date, the limit is $1 million.

It’s important to note that the mortgage interest deduction is only available for loans secured by your home. If you have a personal loan or another type of unsecured loan, you cannot deduct the interest you pay on that loan.

Property Tax Deduction

Another valuable deduction for homeowners is the property tax deduction. To qualify for this deduction, you must meet certain criteria, including the following:

• Itemize your deductions: Like the mortgage interest deduction, you must itemize your deductions to claim the property tax deduction.

• Pay the tax: You can only deduct property taxes that you have paid during the tax year. If you have an escrow account with your lender, only the amount of tax actually paid out of the account during the year qualifies for the deduction.

• Meet certain limitations: The deduction is limited to $10,000 per year or $5,000 if you’re married and filing separately. This limit applies to the total of all state and local taxes, including income and sales taxes, as well as property taxes.

Keep in mind that the property tax deduction only applies to taxes you pay on the property you own.

New Mortgage Closing Costs

When you buy a home or refinance your mortgage, some of the closing costs can be tax deductible. As with the previously mentioned deductions, you must itemize your deductions in order to claim any deductions from your closing costs.

Here are the closing costs you may be able to deduct from your taxable income:

• Points: Points are upfront fees paid to your lender in exchange for a lower interest rate. If you paid points at closing, they may be tax deductible, but this depends on the purpose of your mortgage loan and how the points were paid.
• Mortgage Interest: As previously discussed, the interest you pay on your mortgage loan is tax deductible. This means the portion of your closing costs that went towards interest may also be tax deductible.
• Property Taxes: Again, the property taxes you have paid on the property you own can be tax deductible. The property taxes you pay at closing can be included in that deduction.

Final Thoughts

Deducting mortgage interest, property taxes, and closing costs can be a valuable tax break for homeowners. However, it’s important to understand the rules and limitations to ensure you’re maximizing your tax benefits. If you’re not sure which deductions you qualify for or how to claim them, consult with a tax professional or use tax preparation software.

Disclaimers: Consult a tax advisor for applicability to your situation. This information is current as of April 2023. Sources: IRS, Publication 530 Tax Information for Homeowners. Intuit TurboTax, Deducting Mortgage Interest and Property Tax. H&R Block, Tax Information Center. FreddieMac, Tax Deductions for Homeowners.