Tax-Smart Homeownership: How to Save Thousands on Your Taxes
Owning a home is one of the biggest financial decisions you’ll ever make. But did you know that thoughtful tax planning can save you thousands of dollars over the years? Whether you’re a current homeowner or planning to buy, understanding key tax benefits can put money back in your pocket. Here’s what you need to know.
1. Mortgage Interest: A Powerful Deduction
If you have a mortgage, you can typically deduct the interest paid on up to $750,000 of debt ($1 million if the loan was taken before December 16, 2017), but only if you itemize deductions.
Commonly Overlooked Tax Break: Many homebuyers forget to deduct mortgage points—fees paid to lower their interest rate—when purchasing a home. If you bought a house this year, check your closing documents to see if you paid points. They could be deductible, saving you even more on taxes.
2. Property Taxes: A Deduction with Limits
Property taxes are deductible if you itemize, but there’s a cap. The total deduction for state and local taxes (SALT), including property taxes, is limited to $10,000.
Potential Tax Law Change in 2025: Lawmakers are considering increasing the SALT cap to $20,000 for married couples. Which could mean bigger deductions for many homeowners. We’ll keep you posted on any changes.
About 90% of taxpayers take the standard deduction, so only a tiny percentage benefit from itemizing. If you’re unsure, it’s worth checking with a tax professional.
3. Home Improvements: Track Them or Overpay Later
Home improvements increase your home’s value and can reduce your tax bill when you sell. However, many homeowners overpay in taxes because they don’t track these expenses.
Examples of IRS-Recognized Home Improvements:
- Adding a new deck or patio
- Replacing the roof
- Installing central air conditioning
- Upgrading your kitchen
- Building an addition
While these costs aren’t deductible immediately, they increase your home’s cost basis, reducing taxable capital gains when you sell.
Tax-Saving Tip: Keep receipts and invoices for all major home improvements. A simple way to do this is by uploading them to Google Drive or another cloud storage service.
4. Taxes When Selling Your Home: The Capital Gains Exclusion
When you sell your home, your taxable gain is calculated as follows:
Selling Price– Selling Expenses (e.g., realtor fees)– Adjusted Cost Basis (purchase price + capital improvements + closing costs)= Gain/Loss on Sale
If you have a gain, you might owe capital gains tax. However, the Section 121 Exclusion can help you avoid paying taxes on up to $250,000 of gain ($500,000 for married couples) if you meet these conditions:
Ownership: You owned the home for at least 2 years in the last 5 years. (Only one spouse needs to meet this requirement.) Residence: You lived in the house as your primary residence for at least 2 years in the last 5 years. (Both spouses must meet this requirement.) Look-Back Rule: You haven’t used the exclusion on another home sale in the past 2 years.
5. Partial Exemption: Unexpected Life Changes? You May Still Qualify
If you don’t meet the full requirements, you might still qualify for a partial exemption if you had to sell due to:
- Job Relocation (new job at least 50 miles farther from home)
- Health Reasons (moving for medical care or to care for a family member)
- Unforeseen Circumstances (divorce, death, financial hardship, natural disaster)
You can still exclude a portion of your gain based on how long you lived in the home.
6. Real-Life Tax Savings Example
Imagine you bought a home for $200,000 in 2018. Over the years, you made $50,000 in improvements (new deck, roof, siding). In 2025, you sell the home for $500,000. Here’s how your taxes would look:
Sale Price: $500,000
- Selling Costs: $20,000 (realtor fees, etc.)
- Adjusted Basis: $250,000 (purchase price + improvements)
- = Total Gain: $230,000
Since the gain is below the $250,000 exemption, you owe $0 in capital gains tax!
But what if you didn’t keep track of your $50,000 in home improvements?
You’d only be able to prove a $200,000 cost basis, meaning you’d owe taxes on $20,000 of capital gains—an expensive mistake.
Final Thoughts: Take Control of Your Tax Savings
Understanding these tax breaks can help you save thousands, whether buying, owning, or selling a home. Even if you use a tax preparer, knowing these rules allows you to double-check their work and maximize your savings.
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Get Expert Guidance from Sandbox Financial Partners
Navigating homeownership taxes can be complex, but you don’t have to do it alone. At Sandbox Financial Partners, we specialize in helping homeowners maximize their tax benefits and make smarter financial decisions. Schedule a free consultation with us today to ensure you take full advantage of every tax-saving opportunity.