Tax deductions and credits for a primary residence are more limited compared to those available for rental properties. For rental properties, expenses such as maintenance, repairs, property management fees, mortgage interest, and other operational costs are generally deductible against rental income. This article explores the tax deductions and credits available for owning a primary residence.

Property tax deduction

A combined deduction limit of $10,000 applies to real estate taxes, state income taxes, and local taxes. It is set to expire in 2026 tax year due to the Tax Cuts and Jobs Act unless extended or modified by future legislation.

If you have low mortgage interest, you are generally better off taking the standard deduction. For 2023 tax year, the standard deduction is $27,700 for married couples filing jointly, $13,850 for single filers, and $20,800 for heads of household These amounts are adjusted annually for inflation.

Mortgage interest deduction

The mortgage interest deduction applies to interest paid on mortgage debt up to $750,000. This limit is scheduled to change after 2025 tax year.

If you do not have mortgage interest or other significant itemized deductions, it may be more beneficial to take the standard deduction.

However, California allows you to deduct the full amount of real estate and local taxes, as well as mortgage interest without limitations. As a result, it is possible to use the standard deduction on your federal return while itemizing deductions on your California state return.

Primary Home Capital Gain Exclusion

For married couples filing jointly, up to $500,000 of capital gains can be excluded. For single filers and married individuals filing separately, up to $250,000 of capital gains can be excluded.

You must have owned and used the property as your primary residence for at least 2 of the 5 years before the sale.

Home improvement expenses (as opposed to repair expenses) can be used to reduce the capital gain if your profit exceeds the exclusion limit when you sell your home. They are not deductible in current year.

Common Residential Energy Credits

  • Solar Roof
    • Credit: 30% of the installation cost.
  • Insulation Materials:
    • Criteria: Must meet the standards set by the International Energy Conservation Code (IECC).
    • Credit: 30% of the cost.
    • Limit: Up to $1,200 for insulation or air sealing material systems.
  • Exterior Doors:
    • Criteria: Must meet Energy Star program requirements.
    • Credit: 30% of the cost.
    • Limit: $250 for one door and $500 total for all exterior doors.
  • Windows and Skylights:
    • Criteria: Must meet Energy Star certification requirements.
    • Credit: 30% of the cost.
    • Limit: Up to $600 for windows.
  • Home Energy Audits:
    • Credit: 30% of the cost.
    • Limit: Up to $150 for the audit.
  • Central Air Conditioners:
    • Criteria: Must meet the highest efficiency tier established by the Consortium for Energy Efficiency (CEE) at the beginning of the calendar year.
    • Credit: 30% of the cost.
    • Limit: Up to $600 for the central air conditioner.

The above energy credits are claimed on form 5695 following the instructions.