IRS Loopholes for Homeowners (Legal): 12 Deductions They Don’t Want You to Know About (Save $3k+ Yearly)
The IRS offers numerous breaks specifically designed for homeowners, but many people either aren’t aware of them or don’t understand how to properly claim them. These aren’t loopholes in the traditional sense—they’re perfectly legal deductions that Congress has authorized to encourage homeownership. The problem is, they’re often buried in complex tax code language that makes them seem out of reach for the average person.
Over the years, I’ve studied these deductions extensively, and I’ve seen how transforming even a small portion of your housing expenses into tax savings can make a substantial difference in your annual budget. By the time you finish reading this article, you’ll have a clear roadmap to potentially save $3,000 or more each year—legally and ethically—by taking advantage of these often-overlooked homeowner tax benefits.
1. Mortgage Interest Deduction: Turning Your Biggest Expense into a Tax Saver
For many homeowners, the mortgage interest deduction is the most valuable tax break they’ll ever claim. Here’s how it works: you can deduct the interest you pay on your mortgage loan(s) for your primary residence and one additional home. The catch? There are limits based on when you took out your loan.
If you purchased your home after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt. If you bought your home before that date, the limit is $1 million. This deduction is particularly powerful in the early years of your mortgage when most of your payment goes toward interest rather than principal.
Many homeowners are surprised at how much of their monthly payment is going toward interest. By properly claiming this deduction, you can turn that seemingly large expense into a significant tax reduction. Just remember, you must itemize your deductions to claim this benefit, which means you’ll need to keep careful records of your mortgage payments throughout the year.
2. Mortgage Points Deduction: Getting Immediate Tax Relief for Prepaid Interest
Mortgage points, also known as discount points, are fees you pay your lender at closing to reduce your interest rate. Each point typically costs 1% of your loan amount and can lower your interest rate by about 0.25%. What many homeowners don’t realize is that these points can often be deducted on your tax return.
If you’re purchasing your primary residence, you may be able to deduct the full amount of mortgage points in the year you pay them, rather than spreading the deduction over the life of the loan. This can provide a substantial tax benefit in the year you buy your home.
The key is to ensure you meet all the requirements: the points must be for your primary residence, you must itemize deductions, and the points must be calculated in a specific way on your tax return. Many people pay thousands in points at closing but never claim the deduction because they didn’t realize it was available.
3. Property Tax Deduction: Maximizing Your State and Local Tax Break
Property taxes are one of the most substantial ongoing costs of homeownership, but they’re also deductible—up to a point. The Tax Cuts and Jobs Act of 2017 established a $10,000 cap on the deduction for state and local taxes (SALT), which includes property taxes along with state and local income or sales taxes.
This deduction can be particularly valuable if you live in a high-tax state or have a higher-value home with substantial property taxes. Even if your total SALT deductions exceed $10,000, you can still claim the maximum $10,000 deduction.
One thing that surprises many homeowners when they first learn about this deduction is how many different types of property taxes qualify. This isn’t just limited to your annual property tax bill—it can include special assessments for community improvements and even taxes paid through your mortgage escrow account.
4. Home Equity Loan Interest Deduction: Using Your Home’s Value to Your Tax Advantage
If you’ve taken out a home equity loan or line of credit, you might be able to deduct the interest you pay on it—but only if you use the funds for certain purposes. The IRS allows you to deduct interest on home equity debt up to $100,000 (or $50,000 if married filing separately) if the proceeds are used to buy, build, or substantially improve your home.
This deduction can be a powerful tool when used strategically. For example, if you’re planning a major home renovation, using a home equity loan to finance it not only gives you access to potentially lower interest rates but also makes the interest paid tax-deductible.
Many homeowners use this strategy to finance kitchen remodels, add bedrooms, or install energy-efficient systems—all while reducing their tax liability. Just be cautious about taking on too much debt; the tax deduction doesn’t eliminate the cost, it merely reduces it.
5. Residential Energy Credits: Getting Paid to Make Your Home More Efficient
The federal government wants to encourage homeowners to invest in energy-efficient improvements, so they’ve created tax credits for certain upgrades. These aren’t just deductions—they’re actual credits that directly reduce your tax liability dollar-for-dollar.
Eligible improvements include installing solar panels, geothermal heat pumps, small wind energy systems, and certain energy-efficient windows and doors. The credit typically amounts to 30% of the cost of these improvements, with no upper limit for some categories.
When people install solar panels on their roofs, they’re often surprised at how substantial the tax credit is. The initial cost might seem significant, but the tax credit dramatically reduces the out-of-pocket expense. Plus, they save on utility bills in the long run. Always check the specific requirements for each credit, as some have expiration dates or specific installation requirements.
6. Home Office Deduction: Turning Your Workspace into a Tax Break
If you work from home, you might be eligible for the home office deduction. This allows you to deduct a portion of your home expenses—including mortgage interest, property taxes, utilities, and maintenance—that corresponds to the percentage of your home used exclusively for business.
To qualify, you must use the space regularly and exclusively for business purposes. This means your home office should be a dedicated space where you conduct the majority of your business activities.
Many people set up home offices in spare bedrooms, converted garages, or even sophisticated home office additions. The key is to maintain accurate records of your expenses and the percentage of your home used for business. This deduction can be substantial, especially when factoring in utilities and maintenance costs.
7. Private Mortgage Insurance Deduction: Reducing the Cost of Your Mortgage Insurance
If you put down less than 20% when you bought your home, you’re likely paying private mortgage insurance (PMI). What you might not know is that under certain circumstances, you can deduct this PMI premium on your tax return.
The deduction is available to taxpayers with original mortgage contracts taken out before January 1, 2007, or after December 31, 2023. For mortgages between these dates, the deduction was temporarily extended but has expired for 2023 returns.
This deduction phases out for higher-income taxpayers, but if you fall within the eligible income range, it can help offset the additional cost of having PMI. Many first-time homebuyers who couldn’t afford a larger down payment use this deduction to minimize their overall housing costs.
8. Refinancing Costs Deduction: Making the Most of Lower Rates
When homeowners refinance their mortgages to secure better interest rates or loan terms, they often overlook the tax implications of the associated costs. Refinancing points, which are similar to mortgage points, can be deducted—but not in the way many people expect.
Unlike mortgage points for a purchase, refinancing points must be amortized (deducted gradually) over the life of the new loan rather than being taken as a full deduction in the year they’re paid. This means you’ll need to spread the deduction across your tax returns for each year of the loan term.
What many homeowners don’t realize is that if you refinance again or sell your home before the loan term ends, you can deduct the remaining unamortized points in the year the loan is paid off. This can provide an unexpected tax benefit if you decide to refinance multiple times or sell your home before the original loan term expires.
9. The Augusta Rule (14-Day Rental Exclusion): Monetizing Your Home Without Tax Penalties
The “Augusta Rule” refers to a little-known tax provision that allows homeowners to rent out their primary residence for up to 14 days per year without reporting the income on their tax return. This rule was originally intended to benefit homeowners near venues for major events like the Masters Tournament in Augusta, Georgia, who could rent out their homes during peak tourist seasons.
What makes this deduction particularly valuable is that you don’t need to itemize to claim it, and there’s no limit on how much you can earn during those 14 days. Whether you’re renting out your beach house during peak season or your city home during a major convention, this provision allows you to generate additional income without increasing your tax liability.
10. Capital Gains Exclusion on Home Sale: Protecting Your Investment
When you sell your primary residence, you may be eligible to exclude up to $250,000 (if single) or $500,000 (if married filing jointly) of capital gains from your taxable income. This exclusion applies if you’ve owned and occupied the home as your primary residence for at least two out of the five years preceding the sale.
What many homeowners overlook is how home improvement expenses can increase your home’s basis, potentially reducing your capital gains tax liability further. Every dollar you spend on permanent improvements—such as adding a room, installing new systems, or renovating kitchens and bathrooms—increases your basis, which is subtracted from your home’s sale price to determine your capital gain.
11. Health Savings Account Contributions: A Triple Tax Advantage for Self-Employed Homeowners
If you’re self-employed and have a high-deductible health insurance plan, you may be eligible to contribute to a Health Savings Account (HSA). These accounts offer a unique triple tax advantage: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
For homeowners who are self-employed, HSAs can be particularly valuable as they provide a way to save for healthcare costs while reducing taxable income. Contribution limits for 2023 are $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution allowed for those aged 55 or older.
12. Other Considerations: Maximizing Your Savings
To fully benefit from these deductions, it’s essential to understand the broader tax landscape for homeowners. Here are some additional considerations:
Itemizing vs. Standard Deduction
The ability to claim many of these deductions depends on itemizing rather than taking the standard deduction. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. If your total itemized deductions—including mortgage interest, property taxes, and other qualifying expenses—exceed these amounts, itemizing will save you more money.
Record-Keeping
Maintaining thorough records is crucial for claiming these deductions. Keep copies of mortgage statements, property tax bills, home improvement receipts, and any other documentation that supports your deductions. Digital organization systems can make this process more manageable and ensure you have access to your records when filing your taxes.
Consulting a Tax Professional
While this guide provides valuable information, everyone’s financial situation is unique. A qualified tax professional can help you navigate complex situations, ensure you’re claiming all eligible deductions, and develop a tax strategy that aligns with your overall financial goals.
Conclusion
Homeownership comes with significant financial responsibilities, but it also offers substantial tax advantages that can save you thousands of dollars each year. By understanding and properly claiming these often-overlooked deductions, you can reduce your tax liability while enjoying the benefits of homeownership.
Remember that tax laws can change, and individual circumstances vary, so it’s always wise to consult with a tax professional who can provide personalized advice based on your specific situation. With careful planning and attention to detail, you can maximize your tax savings and make your homeownership investment work harder for you.
