Taxes and Homeownership: What Military Families Should Know

Owning a home is more than an excellent investment; by understanding how taxes and homeownership complement one another, you can significantly reduce your overall tax burden. 

Taxes and homeownership: an overview

Buying a home is exciting. It's also a wise financial decision. Not only do most properties build equity over time, but there are also many tax advantages to owning a home. The IRS allows several tax deductions for homeowners, from property taxes to home workspaces.

Understanding these tax advantages—and how to use them—could mean substantial savings for your family.

Tax tips for new homeowners

Tax season can feel a bit overwhelming, especially for new homeowners. Buying a home means bidding farewell to the 1040EZ tax form and the easy filing that comes with it. Homeownership complicates the tax filing process, but the tax advantages of owning a home make the process worth the headache.

A few tax tips for new homeowners can demystify the filing process. First, familiarize yourself with IRS tax credits and deductions. Tax deductions lower your taxable income, therefore lowering your overall tax burden. A lower tax burden means you will pay fewer taxes overall or receive a greater tax refund.

Homeowners are eligible for several of these deductions, which we mention in more detail below.

New homeowners should consider consulting a tax professional when filing for the first time. These professionals can also help military homeowners, whose additional tax considerations can further complicate the process. Once you understand the basics of taxes and homeownership, the process should become more manageable in the future. 

To itemize or not to itemize: that is the question

There are two types of tax deductions for homeowners: standard and itemized.

All taxpayers are eligible for a standard deduction, which lowers the tax burden based on the taxpayer's familial status. The standard deduction amounts for the 2021 tax year (filed in 2022) are:

• $12,550 for single taxpayers and married individuals filing separately

• $18,800 for heads of household

• $25,100 for married couples filing jointly or qualifying widow(er)s

Taxpayers can choose to take the standard deduction (that is, lower their tax burden by the above amount) or itemize their deductions instead. Itemized deductions are a detailed account of all allowable expenses incurred throughout the year, including education and medical expenses and approved expenses associated with homeownership.

Most taxpayers will take the standardized deduction. However, if the total of your itemized deductions is greater than the standard deduction, it makes more financial sense to itemize. The IRS has many deductions available to homeowners, so if you own your home, itemizing may lower your tax burden significantly more than claiming the standard deduction.

Tax advantages of owning a home: deductions for military homeowners

If you decide to itemize your deductions (that is, the total amount of deductions is greater than the standard deduction amount), make sure you include every deduction possible. 

There are many tax advantages of owning a home. Common itemized deductions for homeowners include:

Mortgage interest

If you have a mortgage on your home, you can deduct the interest paid on your loan. This is perhaps the most significant itemized deduction you will take as a homeowner, especially if you recently purchased the home. At the beginning of your mortgage, most of your payment is interest, with very little going towards the principal. 

There are limits to this deduction, however. First, you cannot deduct any amount paid to the loan's principal; it must be the interest only. Secondly, you cannot deduct more than $750,000 in interest for joint filers, or $375,000 for single or separate filers. 

Home equity loan interest

If you took out a home equity loan, sometimes known as a second mortgage, you might be able to deduct the interest paid on this loan. Only home equity loans taken specifically for home improvement costs are eligible for this deduction. 

Property taxes

Another great tax advantage of owning a home is the property tax deduction. This deduction allows homeowners to deduct up to $10,000 in property taxes if filing jointly, or $5,000 if married but filing separately. If you live in an area with high property taxes, this deduction can represent significant savings.

Home office expenses

If you operate a business from your home, you may be able to deduct the expense of owning and maintaining that space. This deduction is based on the square footage of your office space. However, you must use your space exclusively for business purposes, and other exclusions apply to this deduction. Consult a tax professional to learn more. 

Mortgage insurance

Many military families use a VA loan for their home purchases. Unlike conventional loans, VA loans do not require private mortgage insurance (PMI). However, if your mortgage is a conventional loan, and did not put 20% of the home's value down at closing, you likely have a PMI payment. You can itemize these insurance payments on your taxes.

Find a detailed list of IRS-approved homeowner deductions here. 

Need help navigating your taxes?

If filing your taxes makes your head spin, you are not alone. It can be confusing to navigate taxes and homeownership considerations, especially if you are a new homeowner. Consider consulting a tax professional for assistance. A qualified and experienced tax professional will help you understand the filing process and claim the maximum deductions to effectively lower your tax burden. 

As a military member, you are eligible for free tax help through the Volunteer Income Tax Assistance Program (VITA). This program can help military service members and dependents learn more about taxes and homeownership. Additionally, the VITA program can help answer any other tax-related questions you might have.

Click here to learn more about the VITA program and find a location near you.

Understanding taxes and homeownership can be complicated. Learn more about the tax advantages of owning a home in this PCS Grades interview with military spouse and real estate expert Erica Ward.