Understanding the tax benefits of owning your home

June 23, 2016
Last updated:
March 8, 2022
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You already know that owning a home carries with it certain tax benefits—you can write off mortgage interest and property tax. Those write-offs may be large enough to reduce your income tax bill, thus effectively reducing your house payment.

Before we talk about tax specifics, we should mention that we are not in the business of giving tax advice; that’s for your CPA or tax preparer. But understanding how these deductions actually work will help you be a lot more informed when you talk to your tax advisor.

Recap: how income taxes work

What follows is an over-simplified version of the tax return. We want to review in a general way how taxes work, not to teach you to prepare your income tax return!

When your tax preparer (or you) completes your tax return, he or she starts by looking at your filing status: Single, Married Filing Jointly, Married Filing Separately, or Head of Household. For these examples, we’ll talk only about a married couple filing a joint return.

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To calculate your income tax, you enter your gross income, then subtract deductions and exemptions. What’s left is the Taxable Income. This is the number used to calculate your tax. If that number is more than what your employer has withheld from your regular paycheck, you’ll have to make up the difference. If it’s less, you’ll get a refund from the IRS.

Related: Are you making these common homeowners tax mistakes?

If you don’t have a lot of deductions, you’ll use the Standard Deduction; for 2021, it’s $12,550 for a single person, or $25,100 for a married couple filing together. You will use the greater of the Standard Deduction or Itemized Deductions.

Let’s say you’re considering a home for $500,000 and you can make a down payment of $100,000. You’ll get a loan for $400,000 at 3.75%. This means that you’ll pay $14,874 interest in the first 12 months.

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You’ll also be able to deduct the property taxes you pay; if your property tax bill on your new home amounts to $5,126, you’ll be able to deduct that amount, as well, for a total of $20,000.

Nailing down the tax benefits of homeownership

If your taxable income (after all deductions and exemptions) is less than $100,000, you’ll use the Tax Tables. You’ll find these inside the 1040 Instructions, which you can download from IRS.Gov. Let’s say your taxable income is $75,000 without itemizing your deductions. You’ll pay $10,344 (married, filing jointly).

If you itemize your deductions as above, your taxable income will drop to $67,600. Your tax will be $9,221—$1,123 less. In that example, being able to write off $20,000 in mortgage interest and property tax will save you nearly $100 a month in taxes.

Tax Benefits Owning A Home

Keep in mind that you’ll only be able to deduct interest and property taxes you’ve actually paid, so if you buy your first home in the middle of the year, you’ll only get half the amount of deduction. Keep in mind that the tax benefits are based on the difference between your Standard Deduction and your total itemized deductions. You will use whichever approach gives you the lower tax bill.

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Getting the benefits during the year

You don’t have to wait until the end of the year to realize your tax savings. When you know what your income and write-offs will be during the year, you can tell your payroll department to increase the number of exemptions you claim (some people call them “dependents”) using a W4 form.

If your Itemized Deductions are $7,400 lower than the Standard Deduction, you would claim an additional 2 exemptions. This will increase your take-home pay so that you get the benefit of your deductions with each paycheck, rather than having to wait until the end of the year for a refund. You’ll find a simple worksheet on the W4 form, which you can download from IRS.Gov.

As we said at the beginning, we are oversimplifying. You should have a conversation with your tax adviser to get specific numbers for your own situation. But knowing even in a general way how tax deductions actually work, you’ll be in a much better position to get what you want from your tax professional and to get the most benefit from the tax aspect of homeownership.

If you own a home and want to keep your tax benefits while moving by purchasing a new home, click the following link to download our ebook about buying and selling at the same time.

For anyone just looking to apply for a mortgage and reap the tax benefits of homeownership, click the button below. We’ll get you moving in the right direction, fast.

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