Becoming a homeowner can change your finances, including how much state and federal tax you must pay. Whether you’re a renter considering buying a home or want to make the most of a property you already have, we’ll review six primary ways being a homeowner cuts taxes and can improve your financial life.
1. Claiming the mortgage interest tax deduction
The federal government offers a mortgage interest tax deduction to incentivize homeownership. It allows you to deduct the interest you pay annually, up to certain limits, on funds borrowed to buy, build, or remodel a home.
A tax deduction is an amount you can subtract from your taxable income, which reduces the amount of tax you owe. For example, if you have a 30-year, fixed-rate, 6% mortgage of $250,000, your principal and interest payment would be about $1,500 monthly.
Your mortgage payments would total $18,000 annually. In the first year, due to amortization, you’d pay approximately $3,000 toward the principal debt balance and $15,000 for interest.
If you itemize on Schedule A, Itemized Deductions, you can claim $15,000 in mortgage interest on your tax return. You can subtract your mortgage interest and any other allowable deductions from your taxable income. Depending on your income and average tax rate, that deduction could significantly cut your tax bill or increase your tax refund.
However, the mortgage interest deduction has a cap. If you’re married and file joint taxes, you can deduct interest paid on up to $750,000 of qualifying debt. If you’re single or married and filing taxes separately, the deduction applies to interest paid on up to $375,000 of debt.
You can claim the mortgage interest deduction on loans secured by your main home or a second home, including first or second mortgages, home improvement loans, home equity loans, home equity lines of credit (HELOCs), and refinanced mortgages.
If your total eligible tax deductions are less than the annual standard deduction, you shouldn’t itemize them. You can choose the method that gives you the lowest tax liability in any tax year.
For 2025, the standard deduction is:
- $15,000 for single taxpayers and married people filing taxes separately
- $22,500 for taxpayers filing as head of household
- $30,000 for married taxpayers filing a joint return and surviving spouses
So, if you’re single and the total of your annual eligible tax deductions — such as mortgage interest, state and local taxes, charitable donations, and a certain amount of medical expenses — exceeds the standard deduction of $15,000, you’ll pay less tax by itemizing.
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2. Claiming a home office tax deduction
If you have part- or full-time income from any trade or business and primarily work from home (even if you’re a renter), you likely have a home business for tax purposes. However, if your only source of income is working from home as a W-2 employee, you can’t claim a home office deduction.
When you have a home office, one type of deduction you can claim is for your direct expenses. Those are costs you incur to set up and maintain your office space, such as installing new carpet, painting the walls, or making necessary repairs.
In addition, you can deduct your office’s indirect expenses based on its size relative to your entire home. These costs are related to your office but affect your entire home or apartment, such as mortgage interest, rent, insurance, and utilities. You’d have to pay them even if you didn’t have a home office.
To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Home, to determine the expenses you can deduct and then file it with Schedule C, Profit or Loss From Business.
3. Receiving capital gains tax exclusions
When you’re a homeowner, another significant tax savings comes when you sell your home. If you lived there for two of the previous five years before a sale, you qualify to exclude up to $250,000, or $500,000 if you file taxes jointly, of capital gains from taxation. This fantastic benefit is available no matter your age and as often as you sell a primary residence in your lifetime.
There are situations where you don’t have to meet the five-year test, including being on official duty in the government, getting separated or divorced, or experiencing the death of a spouse. So, speak with a certified tax professional if you have questions about the capital gains tax exclusion.
4. Building equity
Most homeowners who keep a home for at least five years enjoy higher equity. For example, if your home’s market value is $350,000 and you owe $100,000 for a mortgage and $50,000 on a home equity line of credit, you have $200,000 in equity.
If you have a fixed-rate mortgage, each payment comprises a principal and interest portion. Each monthly payment automatically reduces your outstanding loan balance by a slightly larger amount, which is known as amortization. Therefore, every payment allows you to own more of your home and owe less. That’s different from paying rent, which is a pure out-of-pocket expense.
Although real estate values can go up and down, they have appreciated over the long term. If your home value goes up while your debt goes down, it further boosts your equity.
Once you have enough equity, you may qualify to tap it using a home equity line of credit (HELOC). When you take out a home equity loan or HELOC, you can also deduct a certain amount of interest paid on funds used to buy, build, or remodel your home.
5. Getting a hedge against inflation
Protection from inflation is an often-overlooked advantage of owning a home that saves money. When you have a fixed-rate mortgage, your housing cost can’t change, regardless of mortgage rates or the economy. What you pay is locked for the term of your loan, such as 15 or 30 years.
As inflation causes the price of goods and services to rise, rent prices can skyrocket, which we’ve seen in many large cities. That makes owning a home much more affordable when inflation rears its ugly head. As previously mentioned, homeowners build equity when the price of their home rises.
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6. Paying less than renting (in some areas)
Even with high housing prices and mortgage interest rates, owning a home is still less expensive than renting in many parts of the country outside large cities. Even when you factor in expenses such as a down payment, closing costs, property taxes, homeowners insurance, homeowners association fees, repairs, and maintenance, owning an affordable home can be cheaper than renting over the long run.
