This article was reviewed for accuracy and clarity by professor Susan Pace Hamill, tax law expert at the University of Alabama.
Move over, spring! It’s tax season that’s on everyone’s minds. For many Americans, this time of the year is about making sure their tax returns are filed correctly by mid-April. And, as a homeowner, the post-filing relief can only be rivaled by the satisfaction of finding out you can benefit from more tax deductions than you initially thought.
Tax deductions lower the income you’re taxed on, thereby reducing tax liability and leading to a lower tax bill. Homeowners can benefit from a number of such deductions, including mortgage interest, property taxes, and home office expenses. So, as you wrap up your returns, make sure to check your eligibility and scan the Internal Revenue Service’s official information on 2021 homeowner tax returns.
Standard deduction vs. itemized deductions
First things first: you can’t do both.
Every tax year, you can either take the standard deduction or claim itemized deductions. Many taxpayers take the standard deduction on account of less paperwork, more straightforwardness, and because it can make up for the 2017 cap on property tax deduction. But the choice depends on your situation.
The standard deduction essentially represents a flat sum that reduces your taxable income. The amount differs depending on your filing status (single filer, married couples filing separately, joint filer, head of household) and changes over time. For example, for the 2021 tax year, the standard deduction for a head of household is $18,800 — that’s $150 more than it was for 2020 and $600 less than it will be for the 2022 tax year.
If you go for the standard deduction, you can no longer itemize any further deductions. Check out the IRS interactive tool to see how much your standard deduction is. If the standard deduction you qualify for is less than the sum of your itemized deductions, then itemizing is the better option that can save you money — even though it comes with more forms and time spent on proving your entitlement for said deductions.
Here are 5 itemized tax deductions every homeowner should know about:
1. Property tax deduction
Property tax deduction allows homeowners to write off their property from their federal income taxes. The assessed property tax is usually used by local administrations to fund school districts, police and fire departments, local infrastructure, and public services such as garbage pick-up. If you bought or sold your home during the tax year, you can usually deduct property taxes paid during this time – prior to the sale or since the purchase, respectively.
Notably, property taxes vary heavily depending on the area you live in (county, city, or even neighborhood) and, since 2017, the deduction amount was capped at $10,000 for all state and local taxes combined. This cap is what may influence homeowners to go for the standard deduction instead of itemizing, in hopes of saving more.
2. Mortgage interest deduction
When filing tax returns, checking home mortgage interest deduction (HMID) eligibility is one of the first things homeowners with a mortgage do. Ideally, this deduction fully writes off the mortgage interest amount from the federal income tax of those who qualify.
More often than not, eligible homeowners can deduct the entire home mortgage interest, but the exact deductible sum depends on several factors, such as the date and amount of the mortgage, as well as how you use the mortgage proceeds.
3. Rental expenses deduction
Image: Verin/Shutterstock.com
Those who rent out part of the home may benefit from rental expenses deductions. For instance, any amount going directly toward your tenant’s use (like painting the room they live in) may be fully written off as a rental expense. While you still owe tax on the rental income you receive from the tenant, you can still write off expenses for the rented space, such as: home mortgage interest, mortgage insurance premiums, real estate taxes, and even some nondeductible personal expenses like painting the house exterior or electricity.
Speaking of, when it comes to expenses covering the entire property (like heat and other utilities), you need to divide them between the part of the property rented out and the part used for personal purposes. In this case, the two most common methods for calculating expenses are by the number of rooms or by square footage. Notably, the qualification criteria and method of calculation change if you rent out a second home or a vacation home you don’t use.
4. Home office deduction
When part of your home is exclusively used for non-residential activities, such as working from home, you may be eligible for a home office deduction. If your home office qualifies as your principal place of business, you can deduct home office costs, certain utilities, repairs, maintenance, and other related expenses.
Note that you may be eligible if you are self-employed, an independent contractor or a business owner, and not an employee of a company. Check out the IRS page on the business use of your home for more examples and case-by-case scenarios.
5. Necessary home improvement deduction
Image: riopatuca/Shutterstock.com
This deduction frequently falls under the umbrella of “medically necessary expenses” and can often be fully written off. It includes the dollar amount paid for health care equipment or for medical installations necessary for increased accessibility such as handrails, support bars, building wheelchair ramps, and even widening doorways.
It’s also important to know the difference between repairs and improvements. While home repairs like replacing a broken window pane cannot be deducted, certain necessary improvements like putting in new plumbing or wiring can sometimes be written off even if they are not medically mandated.
Expert Opinions
We asked five experts about how homeowners can make the most of tax deductions, and how tax season can be a good time to maximize their home value as much as possible. Here’s what they had to say:
 Susan Pace Hamill Professor of Law and Honors Professor University of Alabama School of Law |
Tax deductions enjoyed by homeowners are deductions for personal expenses. Generally, for an income tax structure, only deductions for trade or business expenses (section 162) or expenses for the production of income (section 212) should be allowed unless there are compelling tax policy reasons to allow deductions for a particular personal expense. Most personal expenses, including amounts paid as rent for personal housing, are not deductible.
Despite the fact that these are personal, certain expenses incurred by homeowners are deductible for federal income tax purposes as itemized deductions. Itemized deductions are only useful (help the homeowner reduce their income subject to the marginal rates) if the homeowner itemizes their deductions. If the homeowner’s expenses classified as itemized deductions are less than the standard deduction, then such homeowner reduces their taxable income by the standard deduction, and there are no further reductions. In 2021, the standard deduction for married taxpayers filing jointly is $25,100, and the standard deduction for single taxpayers is $12,550. This means the taxpayer’s homeownership deductions plus any other deductible expenses classified as itemized deductions must exceed those amounts for this discussion to be relevant. What do you think are the three essential tax deductions homeowners should know about?
Compared to 2020 submissions, are there any major differences in filing tax returns for homeowners this year? The standard deduction for married taxpayers filing jointly was increased by $300 ($24,800 in 2020 and $25,100 in 2021) and for single taxpayers was increased by $150 ($12,400 in 2020 and $12,550 in 2021). This means the threshold for this discussion being relevant has increased by a small amount. Do you believe homeowners benefit from more tax deductions than non-homeowners? Homeowners that itemize deductions benefit significantly from the home mortgage interest deduction, which is essentially a tax subsidy on owning a home (and improving the home) within the $750,000 limit on principal. No such tax subsidy exists for renters. This violates horizontal equity (similar taxpayers should be treated the same) because a homeowner enjoying the deduction pays less for housing than a comparable renter. This also violates vertical equity because higher-income taxpayers disproportionately benefit from home mortgage deductions due to higher-income taxpayers owning more expensive homes and lower-income taxpayers are more often renters. Do you believe maximizing home value is possible through tax deductions? Especially for homeowners who itemize deductions, strategic use of second mortgages (keeping the $750,000 principal limitation in mind) to maintain the house is a smart way to subsidize the investment in one’s home. However, some homeowners are tempted to purchase a more expensive and often larger house (in class, I describe this as purchasing a “McMansion”) than is needed or is easily afforded (or overspending on improvements and renovations) because of the home mortgage deduction. In addition to encouraging over-investment in real estate on an individual or micro level, the home mortgage deduction encourages over-investment in real estate on a macro level, which distorts the economy. Superior tax policy seeks to minimize economic distortions caused by tax subsidies unless a compelling reason can be shown. Arguments have been made that there are good reasons for allowing home mortgage deductions because home ownership (as opposed to rentals) promotes stability, cuts down on crime, and fosters pride within neighborhoods. However, is a $750,000 home mortgage needed to foster that goal? There are other strong arguments that the limit on the principal for the home mortgage deduction is too high. Perhaps a better approach would be to have a much more modest limit (even indexed based on the area of the country) and allow the deduction to be “above the line,” which would mean lower-income taxpayers taking the standard deduction would benefit from a home mortgage deduction on their modest home. Upper middle class and wealthy taxpayers do not need and should not be allowed this generous tax subsidy. Any material change along the lines I have described would be strongly opposed by the real estate lobby. How do you think homeowners can reduce time and money spent on tax prep? Homeowners should keep meticulous records regarding their homeownership expenses. The bank issuing the home mortgage will provide a copy of interest (and principal payment) records that should be kept in a special file. A homeowner’s file should also contain all records of capital expenditures such as replacing heating, air conditioning, and hot water systems. These expenditures are added to the basis of the house and may become relevant if, for example, in the future, the homeowner decides to convert the home into rental property–a larger basis would then translate to larger depreciation deductions, but only if these expenditures have been documented. All homeowners who itemize their deductions should hire a competent accountant to prepare their tax returns. Keeping good records will reduce the fee charged by the accountant. With some homeowners delaying their tax submissions, do you have any tips and tricks for those who wait until the last minute to file? A homeowner who has “waited to the last minute” to file may need to file for an extension to complete their tax return. An extension to file, which will be granted, is not an extension to pay any tax owed. Homeowners that need an extension to file may need to make an advanced tax payment before they actually file, to avoid penalties if the final tax owed once they file exceeds the tolerable range. A competent accountant is essential under these circumstances. |
 Annette Nellen Professor and Director of the MST Program San José State University |
What do you think are the three essential tax deductions homeowners should know about?
A homeowner with a mortgage has a few possible tax deductions. These include interest expense on the mortgage up to $750,000 of principal. Property taxes are also deductible. There are limitations and special rules, though. A significant limitation is that these amounts are only deductible if the individual itemizes their deductions (Form 1040, Schedule A) rather than claiming the standard deduction. For 2021, the standard deduction for a single individual is $12,550 and $25,100 for a married couple filing jointly. For many homeowners, their mortgage interest and state and local taxes and charitable contributions (if any) will make itemizing deductions a better tax break than the standard deduction. Another limitation is that if the mortgage on one’s principal residence exceeds $750,000, interest on the excess debt balance is not deductible. Also, individuals may not deduct more than a total of $10,000 of state and local taxes, so if their state income taxes and property taxes exceed that amount, only $10,000 is deductible when they itemize deductions. Homeowners should also check if their state follows the same rules as for federal. For example, in California, the mortgage amount can be up to $1 million and produce deductible mortgage interest. This is also true for federal purposes if the homeowner had the mortgage on December 15, 2017, or earlier. If a homeowner refinances their mortgage and pays points on that refinanced loan, that amount is deductible ratably over the term of the loan. Do you believe homeowners benefit from more tax deductions than non-homeowners? Yes, homeowners get more tax deductions than non-homeowners or renters. The homeowner with a mortgage can deduct interest expense and property taxes if they itemize their deductions (see details above). Renters do not get any federal (Form 1040) deductions. Some states might have a deduction or tax credit for renters. How do you think homeowners can reduce time and money spent on tax prep? Homeowners need to keep good records to maximize the tax benefits of owning a home and be ready to prepare a proper tax return. If they have a mortgage on their home, the lender will provide them with a Form 1098 after the end of the year (with a copy to the IRS too). If the lender is also collecting monthly amounts to pay the owner’s property taxes, they will also provide that information. If the owner pays the property taxes on their own, they will need to keep records (the bill and payment evidence) on the amount paid during the year. Homeowners should also keep records of improvements made to the residence, such as a new roof or remodeling of a kitchen. These amounts increase the basis of the property, which is relevant when they sell the property, particularly in parts of the country where homeowners might have large gains in their homes that exceed the amount the tax law allows to be excluded ($250,000 gain if single and $500,000 gain if married filing jointly; with special rules applicable to qualify for this gain exclusion). Documenting their basis in the home (purchase price plus improvements) can help reduce taxes owed on the sale when the gain is larger than these amounts ($250,000 or $500,000). |
 Beverly I. Moran Professor of Law, Emerita Vanderbilt Law School |
What do you think are the three essential tax deductions homeowners should know about?
Compared to 2020 submissions, are there any major differences in filing tax returns for homeowners this year? The National Tax Advocate annual report for 2021 predicts the following problems for 2022:
Do you believe homeowners benefit from more tax deductions than non-homeowners? The Urban-Brookings Tax Policy Center estimates that 90% of all taxpayers use the standard deduction. |
 Tracy J. Noga Wilder Teaching Professor Accounting Department Chair Bentley University |
What do you think are the three essential tax deductions homeowners should know about?
The essential deductions for all homeowners are mortgage interest and real estate property taxes. Additionally, private mortgage insurance (PMI) is also deductible, but not applicable to many homeowners. For self-employed individuals, home office deductions are also valuable. Compared to 2020 submissions, are there any major differences in filing tax returns for homeowners this year? There are not any significant new laws. That being said, the deduction for PMI was set to expire at the end of 2020 but has been extended for 2021. Do you believe homeowners benefit from more tax deductions than non-homeowners? Yes, homeowners have substantial benefits from homeownership. Congress’s intent for some time now has been to encourage homeownership and has consistently supported that with various tax policy decisions over the years. Do you believe maximizing home value is possible through tax deductions? Tax deductions minimize the cash out flow of the expenses of owning a home. Tax deductions do not directly maximize home value. That being said, if the benefits are eliminated by Congress, home prices would definitely suffer. How do you think homeowners can reduce time and money spent on tax prep? Most homeowners can file their own returns, as long as they understand how to itemize their deductions (as opposed to taking a standard deduction). Most tax preparation software packages can also effectively handle these types of returns. A home office deduction could get complicated but can be very manageable for many without professional help. With some homeowners delaying their tax submissions, do you have any tips and tricks for those who wait until the last minute to file? Tax preparation is all about organization. Have a physical folder and an electronic folder to save documents throughout the year as they arrive in your mailbox or inbox. Most taxpayers procrastinate at the thought of collecting all of the information needed to do a return, but if you put it in one place throughout the year, the worst part is over. |
 Nathan Oestreich Professor Charles W. Lamden School of Accountancy Fowler College of Business San Diego State University |
What do you think are the three essential tax deductions homeowners should know about?
The standard deductions essentially doubled in 2018 and have been indexed for inflation. For those who do not itemize, the charitable deduction doubled to $300/$600 for 2021. State and local tax deductions are subject to the $10,000 limit. The limit is the same for joint returns and single individuals (marriage penalty) and is not adjusted for inflation. Compared to 2020 submissions, are there any major differences in filing tax returns for homeowners this year? No, but as the standard deduction increases each year due to inflation, and existing mortgage payments generally do not, fewer will itemize. For those who do not itemize, the charitable deduction doubled to $300/$600 for 2021. Do you believe homeowners benefit from more tax deductions than non-homeowners? Of course. After 2017, many homeowners, especially married ones (see $10,000 SALT limit above), will no longer itemize. For them, there is no tax advantage to homeownership. Do you believe maximizing home value is possible through tax deductions? For those who itemize, their after-tax cost of homeownership is reduced. They get no benefit from itemized deductions up to the standard. When mortgage interest rates increase, home values should decrease. Individuals’ ability to own a home does not go up when interest rates increase. How do you think homeowners can reduce time and money spent on tax prep? If their situation is fairly simple, tax software is very good. If their situation is complex, they need an adviser, but not necessarily a preparer. With some homeowners delaying their tax submissions, do you have any tips and tricks for those who wait until the last minute to file? Just be sure to pay the tax on April 18. Penalties are based on tax due. An extension avoids the 5% per month failure to file penalty for 5 months. |
Fair use and redistribution
We encourage and freely grant permission to reuse, host or repost this article. When doing so, we only ask that you kindly attribute the authors by linking to Point2Homes.com or this page, so that your readers can learn more about this project, the research behind it and its methodology.
