Curated by: Rubric Advisors
Tax Planning
Primary Residence Tax Benefits
Learn the key tax benefits of homeownership, from mortgage interest and property tax deductions to the Section 121 capital gains exclusion.
Primary Residence Tax Benefits
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Mortgage Interest Deduction
- Homeowners who itemize can deduct interest on up to $750,000 of mortgage debt (TCJA limit)
- Mortgages originated before December 15, 2017 retain the prior $1 million limit
- The deduction applies to acquisition debt used to buy, build, or substantially improve the home
- Interest on second homes also qualifies, subject to the same combined debt limit
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Mortgage Interest Deduction
- Homeowners who itemize can deduct interest on up to $750,000 of mortgage debt (TCJA limit)
- Mortgages originated before December 15, 2017 retain the prior $1 million limit
- The deduction applies to acquisition debt used to buy, build, or substantially improve the home
- Interest on second homes also qualifies, subject to the same combined debt limit
Property Tax, SALT, and Home Equity Interest
- State and local property taxes are deductible when itemizing, but SALT is capped at $40,000
- The $40,000 cap includes state income or sales taxes combined with property taxes
- Home equity loan interest is deductible only if proceeds improve the secured residence
- Combined acquisition and home equity debt must stay within the $750,000 limit
Capital Gains Exclusion, Section 121
- Single filers may exclude up to $250,000 of gain; married couples up to $500,000
- The seller must have owned and used the home as a primary residence for 2 of the last 5 years
- The exclusion can generally be used once every two years with no limit on lifetime use
- A surviving spouse may claim the full $500,000 exclusion if the sale occurs within 2 years
Ownership, Use Tests, and Partial Exclusions
- The 2-year ownership and use periods do not need to be consecutive within the 5-year window
- Military, Foreign Service, and intelligence personnel may suspend the 5-year test period
- Sellers who fail the 2-year test may qualify for a partial exclusion due to unforeseen events
- Homes converted from rental use may have depreciation gain that is not excludable
Home Office Deduction for Self-Employed
- Self-employed homeowners may deduct a portion of housing costs for a qualifying home office
- The space must be used regularly and exclusively as the principal place of business
- The simplified method allows a deduction of $5 per square foot, up to 300 square feet
- W-2 employees generally cannot claim a home office deduction under current federal tax law
Energy Efficiency Tax Credits
- The Residential Clean Energy Credit covers 30% of solar, wind, and geothermal system costs
- The Energy Efficient Home Improvement Credit covers qualifying upgrades up to $3,200 per year
- Eligible improvements include heat pumps, insulation, windows, doors, and efficient HVAC systems
- Credits directly reduce tax liability dollar-for-dollar, making them more valuable than deductions
Mortgage Points and Loan-Related Deductions
- Points paid on a purchase mortgage are generally deductible in full in the year of closing
- Points paid on a refinance must be amortized over the life of the new loan
- Private mortgage insurance premiums have historically been deductible but availability varies
- Loan origination fees that represent prepaid interest are treated the same as points
Related Topics
Itemized vs Standard Deduction
Choosing between the standard deduction and itemizing depends on your mortgage interest, state taxes, charitable giving, and medical expenses, strategic timing can tip the balance.
Tax PlanningSelling Your Primary Home (Section 121 Exclusion)
Section 121 allows homeowners to exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of a primary residence, subject to ownership and use requirements.
Tax PlanningAlternative Minimum Tax (AMT) Planning
The Alternative Minimum Tax is a parallel tax system that can significantly increase your tax bill, especially when exercising ISOs, earning large bonuses, or living in high-tax states. Strategic planning can minimize or avoid AMT exposure.