The Tax Benefits of Owning a Home in California

Homeownership can have many benefits for first-time homebuyers. For many people, owning a home means establishing permanent roots in an area and building wealth through equity.

But some people might wonder what other benefits owning a home might have — especially in California, where houses are some of the most expensive in the nation. This makes understanding possible tax benefits of owning a home an important step to planning the purchase of one.

 

Tax Deductions vs Tax Credits

Depending on your individual circumstances, you may qualify for several tax deductions and tax credits. While the two terms are similar in that they can both lower your tax bill, they do this in different ways.

In some instances, you might have enough tax deductions to lower you taxable income and, as a result, lower your tax bill. When looking at your possible deductions, it's important to know what tax bracket you fall into.

On the other hand, a tax credit is applied directly to your tax bill to reduce the amount you owe.

 

Understanding California Real Estate Tax Deductions and Credits

Some tax deductions and credits are available to homeowners throughout the United States, while others are specific tax benefits of owning a house in California. You may want to discuss these tax breaks for buying a house with your tax advisor. This will help you better understand what you might be able to expect for your specific situation.

Tax rules change occasionally, so it pays to review these tax advantages of homeownership every time you prepare your federal income taxes. In some cases, your tax bill could be lower if you take the standard deduction rather than itemize your taxes, which is required to take advantage of tax deductions related to homeownership.

Some of the tax benefits of owning a home in California that you may qualify for include:

Mortgage Interest Deductions

For most homeowners, the biggest tax benefit of owning a home in California comes from the mortgage interest deduction. Your mortgage lender will provide you with an IRS Form 1098 at the end of each year that itemizes how much you paid in interest on your loan. You can deduct that amount from your taxable income in many cases.

The mortgage interest deduction is also applicable to loans for both primary and second homes that are used to buy, build or improve the property.

If you purchased your home after December 31, 2017, you can only deduct the mortgage interest on up to $750,000 of mortgage debt. If you bought your house between 1987 and Dec. 31, 2017, you can only deduct the mortgage interest on up to $1 million of mortgage debt.

Mortgage Point Deduction

Some homebuyers pay discount points when they borrow money to lower their interest rate. A discount point, typically a percentage of the loan amount, can be paid at the closing to reduce your interest rate.

According to the IRS, these points are also eligible for a tax deduction. If you paid points for your primary residence, you can usually deduct the points on your tax return for the year you paid them. If you paid points for a second home, you typically must deduct the amount of interest covered by those points gradually rather than in one year.

Property Tax Deductions

Unlike renters, homeowners must pay property taxes according to their state and local jurisdiction’s rules. If you’re wondering how are property taxes calculated in California, it can be complex. Generally, property taxes are based on your home’s assessed value and the tax rate, but there are some additional tax rules in California that may apply.

The good news: You can deduct some or all of your property tax payments on your income tax return. Most people pay their property taxes incrementally throughout the year either individually or as part of their mortgage payment. Keep your records if you pay for them on your own. If you pay through your mortgage lender, you’ll receive a statement at the end of the year that shows how much you paid on your property taxes.

The amount you can deduct for combined state and local income and property taxes is capped at $10,000.

Mortgage Insurance Premiums Deductions

Homeowners who make a down payment of less than 20% and those who use FHA financing often pay mortgage insurance as part of their loan. Between 2006 and 2022, those mortgage insurance premiums were tax deductible for some taxpayers.

That tax deduction ended as of tax returns filed for 2022, but it may be possible to amend a tax return for previous years and take that tax deduction if you neglected it in the past.

Homeowners’ Exemption

A special property tax deduction in California is available for homeowners on their primary residence. Homeowners need to file a form with the tax assessor in their county to receive a $7,000 reduction in taxable value for the home. That reduction in taxable value remains in place until the homeowners sell the property or no longer use it as their primary residence.

Closing Costs Deductions

Most of the closing costs you pay at the closing cannot be deducted from your taxes. Those costs include title insurance premiums, document preparation fees, appraisal costs, mortgage insurance, homeowner association dues, utilities and homeowner’s insurance premiums.

The mortgage points mentioned above, which are tax deductible, are included in your closing costs.

Home Energy Credits

Multiple credits are available for making energy efficient improvements to your home or adding renewable energy. The federal residential clean energy credit, available from 2022 to 2032, provides a tax credit of 30% of the cost of renewable energy improvements to your home such as solar power and battery storage.

The federal energy efficient home improvement tax credit, available on existing homes, provides a tax credit for energy efficient improvements to your home up to certain limits.

Home Improvement Deductions

If you use a home equity line of credit (HELOC) to pay for home improvements, you may be able to deduct the interest on your HELOC from your taxes. The interest on both your primary loan and your HELOC is combined, meaning that the total interest you can deduct must be below the limit set for the year you purchased your home.

For tax years 2018-2025, interest paid on a HELOC is only tax deductible if the loan was used to buy, build or improve your home. In addition, some home improvements that are necessary, such as those made for medical issues, may be tax deductible. But other expenses unrelated to the property, like for college tuition or a boat, are not.

After 2025, for HELOCs secured by your main home or second home, interest you pay on the borrowed funds may be deductible, subject to applicable dollar limitations, regardless of how you use the loan proceeds.

 

First-Time Homebuyer Grants

If you’re looking to purchase your first home, consider using a homebuyer grant that can help you manage taxes associated with homeownership. For example, City National Bank's Ladder Up grant offers down payment requirements as low as 3% without mortgage insurance, along with grants for eligible borrowers of as much as $20,000. However, it can be helpful to note that grant funds may qualify as taxable income.

Depending on your county, your income and the cost of your home, you may be eligible for a Mortgage Credit Certificate. The credit allows first-time homebuyers to take a tax credit of 10% to 50% of the interest they pay on their mortgage.

 

Maximizing Homeownership Tax Benefits in California

To make sure you take advantage of all available tax benefits of owning a home in California, you’ll need to keep records of your property tax payments, the interest you pay on your mortgage, the closing documents from your loan and all receipts for potentially eligible home improvements.

Most homeowners can deduct their mortgage interest and property tax payments. In California, homeowners are also eligible for an exemption on part of their home value when paying their property taxes. Check out some of the other possible tax deductions and credits for which you may be eligible, too, such as energy efficient upgrades.