Owning a home is often the most significant investment you will make. Whether buying your first home, upgrading to a new one, or considering a second property, these tax breaks can help you save money in 2025. Here’s a look at key tax incentives for homeowners:
- Mortgage Interest Deduction: When you buy a home, your mortgage interest payments are generally deductible, unlike rent, which offers no tax break. However, if the balance on your mortgage is greater than $750,000, your deduction is limited. In addition to mortgage interest, mortgage insurance premiums are also deductible if your adjusted gross income is less than $100,000. This is especially helpful for new homeowners with low down payments.
- Property and Income Tax Deduction: You can deduct up to $40,000 in combined state and local property taxes and income (or sales) taxes each year ($20,000 if married filing separately). This deduction phases out for incomes above $500,000 ($250,000 for married filing separately). It’s a valuable perk, especially in high-tax areas.
- Capital Gains Exclusion: Selling your home? You can exclude up to $250,000 of gain ($500,000 for married couples filing jointly or certain surviving spouses) from taxable income, as long as you have lived in the home for at least two of the last five years. This can save you a bundle when you sell.
- IRA Withdrawal for First-Time Homebuyers: If you are a first-time homebuyer, you can pull up to $10,000 from your IRA without penalty to help with purchase costs, like a down payment. It is a great way to get a head start on homeownership.
- Home Office Deduction for the Self-Employed: If you are self-employed and use part of your home exclusively for business, you can deduct a portion of the costs of maintaining your home against your business profits. A simplified option also allows you to claim a $5 deduction per square foot of your workspace, up to 300 sq ft, making the deduction easier to calculate.
- Energy Efficiency Credits: Tax credits are still available for energy-efficient home upgrades, but time is running out:
- The Energy Efficient Home Improvement Credit covers qualifying upgrades (like energy-efficient windows or doors) completed by December 31, 2025.
- The Residential Clean Energy Credit applies to installations like solar panels finished by December 31, 2025. Plan these projects soon to claim these credits before they expire.
Many of these benefits extend to second homes, like vacation properties. To make the most of these tax breaks, keep key documents handy, such as mortgage statements, property tax bills, or receipts for energy-efficient upgrades. Homeownership is a major milestone, and with smart tax planning, you can keep more money in your pocket for what matters most.