Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

Full Bio →

Written by

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

Full Bio →

Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 4, 2013

Advertiser Disclosure

Advertiser Disclosure: We strive to help you make confident loan decisions. Comparison shopping should be easy. We are not affiliated with any one loan provider and cannot guarantee quotes from any single provider. Our partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about loans. Our goal is to be an objective, third-party resource for everything loan related. We update our site regularly, and all content is reviewed by experts.

Home loan borrowers have several tax breaks available for this upcoming tax season.

But instead of using a simpler form, such as the 1040EZ, homeowners must now itemize, or list, their deductions. In order to deduct expenses of owning a home, a person will usually file Form 1040 and itemize deductions on Schedule A.

Mark Steber, Chief Tax Officer for Jackson Hewitt Tax Service, said homeownership usually marks the first time that consumers will itemize tax deductions on a tax return.

“Homeownership makes a tax return complex,” he said. “You can have a complex return and not own a home but you cannot own a home and not have a complex tax return.”

Stages of Homeowner Tax Breaks

For a homeowner, there are three time groupings for tax breaks: buying a home, owning a home, and selling a home.

When buying a home, tax filers can deduct a few items from their taxes. Although most buying costs are not tax deductible, certain closings costs can be added to the market value of one’s home. These costs include but are not limited to, surveys, attorney’s fees, insurance policy, transfer taxes, and title searches.

The majority of deductions are available for current homeowners. The IRS accepts deductions in the following categories:

  • Real estate taxes
  • Local taxes and assessments
  • Mortgage interest
  • Mortgage insurance premiums
  • Adjustments to basis
  • Casualty losses
  • Energy credits

Real Estate Taxes

Real estate taxes are reported to the homeowner on Form 1098. Mortgage loan companies should mail these amounts, via Form 1098, by the end of January each year. Homeowners can also deduct any prorated taxes collected when selling a house. This amount is not always included in Form 1098.

In general, real estate taxes, mortgage interest and mortgage insurance premiums are included in a homeowner’s monthly home loan payment.

Local Taxes and Assessments

Local taxes are deductible if they are charged the same against all property within a jurisdiction and if they are based on the assessed value of the home.

Mortgage Interest

The amount of mortgage loan interest a homeowner paid on their primary or secondary residence is deductible. According to Steber, however big or small the interest rate is for each homeowner, it can still add up to a significant deduction.

“Even with low interest rates, most homeowners still have a substantial interest expense that can make its way onto a tax return,” Steber said.

Mortgage interest deductions have not always been available.  

Ronald DeFilippis, founding partner of Mills and DeFilippis, a New Jersey-based accounting and auditing firm, said the mortgage interest and real estate deduction began decades ago when the government wanted to assist people with homeownership.

“In the last 27 years since the tax act of 1986, they have begun to curtail that deduction by placing limits on it,” DeFilippis said. “In addition, for higher income levels, a taxpayer’s itemized deductions are reduced.”

Mortgage Insurance Premiums

Mortgage insurance premiums paid for new mortgage loans starting after 2006 are deductible as mortgage interest. The deduction is limited if a tax filer’s adjusted gross income (AGI) is greater than $50,000 for separate filing or $100,000 for joint filings.

Adjustment to Basis

Home improvements can be tax deductible. Homeowners should record all of the purchases and efforts made that add value to a home including room additions, landscaping, roof replacements, and adding pools, patios, and decks. Regular upkeep and personal labor costs are not legally allowed to be included in this deduction.

Casualty Losses

If a home is damaged, the amount that is not covered by insurance is deductible. The full deduction is based upon a person’s AGI. Further rules apply in areas hit by federally declared disasters.

Energy Credits

DeFilippis said that most of the tax deductions are widely known, but the lesser known items fall under the energy credits and home office deductions.

The federal government offers tax breaks for homeowners willing to add energy efficient features to one’s home. This year, the credit is limited to 10 percent of the total cost of improvements, up to a $500 total.

Another eco-friendly deduction, which was eliminated last year, was the green tax cuts. Although this second option is no longer available, the process of addition and elimination is common for tax breaks in the country.

“The tax system is an ebbing and flowing kind of system,” Steber said. “Their [green tax cuts] time came and went. The sponsors took on other important tasks.”

Another deduction, the Home Office Deduction, is for homeowners who work from home and have a physical home office where they conduct their primary business and meet with clients.

For the final grouping of selling a home, Steber said it offers very few tax breaks.

Tax filers can visit the IRS websites for a full list all tax deductions