Tax Day: Tax Incentives of Homeownership

Posted by Laine Smith on 4/15/15 9:00 AM

Topics: Economy

Homeownership offers a large number of perks ranging from home equity to personal living preferences, but around this time of year homeowners cash in on one of the biggest homeownership incentives: tax benefits. Here's how being a homeowner pays off come Tax Day.


Mortgage Interest

Your biggest tax deduction as a homeowner comes from a portion of the check you write each month to the mortgage company: your mortgage interest. Due to your mortgage amortization, if you are in the beginning years of your mortgage, the majority of your monthly mortgage payment is going towards your loan's interest rather than principle. Mortgage interest is a good thing, in regards to tax purposes, because all of that interest is deductible, up to $1 million.

If you own a second or vacation home, that mortgage interest is also fully deductible, even if it's not an actual house. Boats and RV's qualify as second homes if they have cooking, sleeping and bathroom facilities.

In some cases, if you pulled out extra cash through a refinance or got a home equity loan or line of credit, the interest paid is tax deductible, as well.


Points refer to what you pay to get a better rate on your purchase or refinance. Also known as an origination fee, one point equals one percent. If you agreed to pay one point on a $200,000 loan, that would amount to $2,000.

Taxpayers can deduct the entirety of points in the year they were paid if:

  • The loan was used to purchase or build their primary home
  • Points are an established business practice in the area
  • Points were within the usual range

Homeowners who paid points on their refinance are also eligible for this tax break, but the points must be deducted over the life of the loan. For example, a homeowner who paid $3,000 in points to refinance their 30 year mortgage can deduct $8.33 per monthly payment or a total of $99.96 if 12 payments were made on the loan in one year.

Property Taxes

Property taxes can also be deducted, though homeowners can only deduct the amount of property tax actually paid to their city or county for the year. If you paid more into escrow, you can't deduct that amount. Any other city or county fees that may have been on the same bill as property taxes are not deductible.

Private Mortgage Insurance (PMI)

If you put down less than 20 percent of your home's purchase price, you are required to pay private mortgage insurance (PMI).  Homeowners who purchased their home on or after January 1, 2007 are eligible to deduct PMI premiums.

The amount homeowners are eligible to deduct is based on income. If your adjusted gross income (AGI) is more than $100,000, the deduction amount begins to phase out. For married taxpayers who file separately, the phase out begins at more than $50,000 AGI. For every $1,000 you make over $100,000, the deduction is reduced by 10 percent.

Sale of Your Home

If you own and occupy your home for at least two of the past five years, you can earn up to $500,000 (for married taxpayers) or $250,000 (for single taxpayers) on the sale of your home and pay no federal income tax.

Costs of selling your home, such as title insurance, broker fees, etc. can also be claimed on your return. If you made certain repairs to the home within 90 days of the sale and for the intent of marketing the home, you can also claim those repairs to reduce capital gains.

At Compass, we are not tax professionals. We always suggest you meet with a Certified Tax Professional before filing your taxes to make sure you are deducting these items properly in accordance with IRS regulations and to ensure you get the highest refund possible.

Tax deductions are a huge benefit of being a homeowner. If you are looking to make your first home purchase, download our Mortgage 101 Handbook for access to information about the home buying and mortgage process.

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