Buying a home is among the major highlights in life, but it often comes at a hard and expensive price in today’s housing market. Reports this summer found that renters are saving hundreds more each month by renting instead of buying. Homeowners are also expected to pay for other expenses, such as property taxes and mortgage interest, that may raise their overall tax bill.
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Fortunately, tax breaks for homebuyers and homeowners abound to make the process of buying a home a little more budget-friendly. While many of these benefits have various ways of qualifying, they greatly help lessen the pain of paying taxes when available.
Using 401(k) or IRA Funds to buy a home
For many prospective homeowners, saving for a down payment is the biggest hurdle. If you have an IRA or a 401(k), you may be able to use those funds to help with purchasing a home.
Traditional IRA: Savers can withdraw up to $10,000 from a traditional IRA to buy, build, or rebuild a first home without incurring the 10% early withdrawal penalty—even if they are younger than 59½. Married couples can each withdraw $10,000 from separate IRAs without penalties. However, the amount withdrawn is still subject to income tax.
Roth IRA: Contributions can be withdrawn at any time, but withdrawing earnings may be subject to taxes and penalties. However, if your IRA has been open for at least five years, you can withdraw up to $10,000 of earnings tax-free and penalty-free for a first home purchase. To qualify, you and your spouse must not have owned a home in the past two years.
401(k) Loans: Unlike IRAs, withdrawals from a 401(k)
typically come in the form of a loan rather than a direct withdrawal. You can borrow up to 50% of your account balance (up to $50,000) tax and penalty-free, but repayment is required. Loan terms generally allow repayment over five years, but the repayment period may be extended for a primary home purchase. If you leave your job, the loan must be repaid quickly to avoid penalties and taxes.
Key tax deductions and credits for homeowners
Owning a home comes with ongoing expenses, but homeowners can take advantage of several tax deductions and credits to reduce their overall costs.
Mortgage Interest Deduction: One of the most significant tax breaks for homeowners is the mortgage interest deduction. If you itemize your taxes, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). The deduction applies to loans used to buy, build, or improve a primary or secondary home. However, this deduction may be reduced or eliminated in future tax policy changes.
Mortgage interest credit: Lower-income homeowners who received a Mortgage Credit Certificate (MCC) from a state or local government may qualify for a mortgage interest tax credit. The credit ranges from 10% to 50% of the mortgage interest paid each year, with a maximum credit of $2,000 if the rate exceeds 20%. Unused portions of the credit can be carried forward for up to three years.
Energy-saving home improvement credits: Homeowners installing qualifying energy-efficient improvements can receive a tax credit of 30% of eligible costs. For the 2024 tax year, the credit applies to:
- Qualified energy efficiency improvements
- Residential energy property expenses
- Home energy audits
Annual limits apply, including:
- $1,200 for energy property costs and qualifying home improvements
- $600 for windows and $150 for home energy audits
- $2,000 for qualified heat pumps, biomass stoves, or boilers
As of 2025, eligible items must be from a qualified manufacturer, and taxpayers must report the product identification number (PIN) on their tax return.
Electric vehicle charging equipment credit: Homeowners who install electric vehicle (EV) charging stations may qualify for a federal tax credit worth 30% of the cost, up to $1,000. The credit applies to both standard and bidirectional charging equipment, which allows electricity to flow back to the grid.
Home renovations for medical deductions: If you make medically necessary changes to your home such as installing ramps, widening doorways, or adding handrails-you can get a medical expense deduction. To deduct the expense, medical expenses must exceed 7.5 percent of your adjusted gross income, and the amount of the deduction is reduced by the amount of increase in value of the home from the renovation.
Property tax deduction: Homeowners who itemize deductions may also be able to deduct property taxes paid in 2024. The deduction is capped at $10,000 ($5,000 for married taxpayers filing separately) and includes state and local income taxes or sales taxes.
Forgiveness of debt on foreclosure or short sale: Normally, when a lender forgives mortgage debt, the amount forgiven is considered taxable income. However, under current tax laws, up to $750,000 of forgiven debt on a primary residence ($375,000 if married filing separately) may be excluded from taxable income through 2025. This exclusion only applies to mortgages used to buy, build, or substantially improve the home and does not cover mortgage debt forgiven for other reasons.
Making the most of homeowner tax breaks
Homeownership comes with financial responsibilities, but available tax deductions and credits can help reduce costs. Whether you are purchasing a home or already own one, understanding these tax benefits can help you maximize savings and make homeownership more affordable.
