8 Tax Deductions for Homeowners

There are several tax breaks for homeowners, but these benefits come with rules and restrictions. We'll cover some of the significant tax benefits for homeowners.

1. Mortgage interest

The mortgage interest deduction allows you to deduct the cost of interest for mortgages used to buy, build, or substantially improve a home. When you first take out a mortgage, most of what you pay your lender is home mortgage interest, and that amount is deductible. This rule applies to all primary mortgages. It applies to second mortgages only if the money you borrow is used for specific purposes.

Deductions are only allowed on up to the first $750,000 of mortgage debt for most filers, half that if you’re married filing separately.

2. Home equity loan or HELOC interest

A home equity loan is a type of loan secured by the equity you've built in your home. It's often referred to as a second mortgage. Home equity lines of credit also are secured by equity, but are you borrow money as needed up to a maximum amount. 

You can deduct the interest you pay on these loans, but there are some additional rules beyond the $750,000 balance limit, which is a total loan limit across all your mortgages.

For loans issued before 2017, any home equity loan or HELOC is eligible for this deduction. For loans taken out since 2017, you can only deduct interest if the loan was used to “buy, build, or substantially improve” the home securing the loan.

Rules are set to change again, so that starting in 2026, there will be no limit on the purpose of the loan, although the $750,000 limit will remain.

3. Discount points

Discount points, also known as mortgage points, allow you to prepay a portion of the interest on your mortgage. Most lenders let you buy points when you close on your loan. Each point or fraction of a point you buy reduces the interest rate on your loan.

Because points are a form of interest, you can deduct the cost of discount points. Keep in mind that other loan fees or closing costs, like origination fees, are not deductible.

4. Property taxes

The IRS allows taxpayers to deduct the cost of paying state and local taxes (SALT). This can include state income taxes and local property taxes. If you live in a high-cost or high-tax area, such as New York or California, this deduction can be substantial.

For 2025, you are limited to deducting a maximum of $10,000 in SALT. For 2026 through 2029, that limit will rise to $40,000.

5. Necessary home improvements

In some instances, a necessary home improvement may be deductible.

This is not for redoing your kitchen or building a deck. Instead, the deduction is for people who need to make their home safe and accessible. For example, adding railways, widening doorways for handicap access, or installing medical equipment are likely to qualify for a deduction.

6. Home office expenses                                                  

If you operate a business out of your home, you can take a deduction for your home office costs.

In general, to qualify, you must use that part of your home regularly and exclusively for business purposes. You can’t deduct costs related to your dining room just because you held a business meeting there once. You also don’t qualify for the deduction if you work from home for another employer.

The amount of the deduction is based on the size of the space dedicated to your home office as compared to the overall size of your home. You can either take the simplified option of $5 per square foot of office space (up to $1,500) or find the percentage of your home’s square footage that is dedicated to the home office and deduct that percentage of the cost of things like mortgage payments, utility payments, insurance, and the like.

7. Capital gains

When you sell your home, you may sell it for more than you originally paid for it. If the home was your primary home, you can deduct a portion of the capital gains you receive, reducing how much you pay in capital gains taxes.

To qualify, you must meet both the ownership test and use test, meaning you must have owned and used the home as your primary residence for at least two out of the last five years.

If you qualify, you can exclude $250,000 of capital gains ($500,000 if married, filing jointly) when you file your tax return after selling the property.

8. Rental income

If you have rental income from a rental property or you rent out part of your home, you may incur some tax-deductible expenses.

For example, if you rent a room in your home or rent a whole property, you can deduct some or all of the cost of property taxes, mortgage interest, utilities, or maintenance as a business expense. Source

Understanding 1031 Exchanges

What to Know from a Lending Perspective

A 1031 Exchange can be a powerful strategy for real estate investors looking to defer capital gains taxes while continuing to grow their portfolio. But when financing is involved, there are several important details that can directly impact the success of your exchange.

Here are a few key points to keep in mind:

A 1031 exchange allows you to sell an investment property and reinvest into another “like-kind” property while deferring taxes 

You must meet strict deadlines: 

• 45 days to identify a replacement property 
• 180 days to close on the new property 

To maximize tax deferral, you should: 

• Purchase a property of equal or greater value 
• Maintain or increase your loan amount (debt) 

If your new loan is smaller, the difference—known as “mortgage boot”—may be taxable 

Sale proceeds are held by a Qualified Intermediary (QI), which means lenders must coordinate closely throughout the process 

Because of this structure, financing a 1031 exchange often involves: 

• Additional documentation 
• Careful timing to meet IRS deadlines 
• Strategic loan structuring to align with your investment goals 

The key takeaway: a successful 1031 exchange isn’t just about finding the right property—it’s about aligning your financing strategy with IRS guidelines. Working with a knowledgeable lending partner can help ensure a smooth transaction while maximizing the financial benefits of your investment.

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NMLS ID 394275 | DRE ID 01769353

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How Does A Mortgage Work?

A mortgage loan allows you to purchase a home without paying the full cost at one time. Mortgages are paid back with interest, and mortgage plans vary in the type and degree of interest you’re required to pay back.

The monthly payment you make to your lender will include two parts:

The first part goes toward the principal, the amount of money you borrow to buy your home.

The second part of the payment goes toward the interest payment, the fee you’re paying in order to borrow the money.

Homeowners are required to make regular payments toward their mortgage. If mortgage payments aren’t made, the lender can take possession of your property; so it’s essential to choose your mortgage plan thoughtfully and to ask the right questions along the way.

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Is a HELOC a Good Idea for You?

If you’re considering a Home Equity Line of Credit (HELOC), it’s crucial to evaluate whether it aligns with your financial goals. A HELOC offers flexibility for various expenses, but it also comes with potential risks like fluctuating interest rates. Understanding both the benefits and drawbacks can help you make an informed decision. So, what factors should you weigh before moving forward with a HELOC?

Understanding HELOC: What It Is and How It Works

A Home Equity Line of Credit (HELOC) offers homeowners a flexible financing option by allowing them to borrow against the equity they’ve built in their property.

Essentially, it’s a revolving line of credit, which means you can withdraw funds as needed, similar to a credit card. You typically use the equity in your home as collateral, and lenders determine your borrowing limit based on your home equity and creditworthiness.

This structure provides the benefit of accessing funds for various purposes, such as home improvements or debt consolidation.

However, it’s crucial to remember that while flexible borrowing is attractive, it also means your home could be at risk if you fail to repay the borrowed amount.

Understanding these dynamics is essential for making informed financial decisions.

Advantages of a HELOC

Taking advantage of a HELOC can provide several financial benefits for homeowners. One of the primary advantages is flexible borrowing. You can withdraw funds as needed, making it ideal for unexpected expenses or planned projects.

Instead of taking out a lump sum, you only pay interest on the amount you use, which can lead to significant savings. Additionally, HELOCs often offer lower interest rates compared to other loan types, particularly credit cards. This can make borrowing more affordable.

Furthermore, the interest you pay on a HELOC may be tax-deductible, adding another layer of financial advantage. Overall, a HELOC can be a smart option for those looking to leverage home equity effectively.

Potential Risks and Disadvantages

While a HELOC can offer many advantages, it also comes with potential risks and disadvantages that homeowners should consider.

One significant risk is interest rate fluctuations; since most HELOCs have variable rates, your monthly payments can increase unexpectedly. This unpredictability may strain your budget if rates rise sharply.

Additionally, repayment challenges can arise, especially if you borrow a large amount. You may find it difficult to manage payments when the draw period ends and full repayment begins.

Moreover, if your home’s value declines, you could end up owing more than your property is worth.

These factors make it essential to weigh the potential drawbacks of a HELOC against your financial situation and goals before proceeding.

Factors to Consider Before Applying

Before applying for a HELOC, it’s crucial to evaluate your financial situation and long-term goals. Start by checking your credit score, as lenders typically require a minimum score for approval. A higher score not only increases your chances of approval but may also result in better interest rates.

Next, consider the repayment terms. Unlike traditional loans, HELOCs often have variable interest rates, which can affect your monthly payments and overall financial stability. Think about whether you can manage these fluctuations.

Additionally, reflect on your purpose for the funds—whether it’s for home improvements, debt consolidation, or other expenses—and how that aligns with your financial strategy. Taking these factors into account will help you make an informed decision.

Alternatives to a HELOC

If a HELOC doesn’t seem like the right fit for your financial needs, there are several alternatives worth considering.

One option is a personal loan, which provides a fixed amount of money you can use for various expenses. Personal loans typically have fixed interest rates and repayment terms, making budgeting easier.

Another alternative is a cash out refinance, where you refinance your existing mortgage for more than you owe and take the difference in cash. This can potentially lower your interest rate while providing the funds you need.

Both options have their pros and cons, so evaluate your financial situation carefully before deciding which route aligns best with your goals and repayment ability.

In the end, whether a HELOC is right for you boils down to your individual financial situation and goals. If you’re ready to take the plunge, make sure you’ve got a solid repayment plan in place. Remember, it’s crucial to keep your eyes on the prize and not get swept away by the allure of easy cash. Weigh the risks and benefits carefully, and you’ll be better equipped to make an informed decision that suits your needs.

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