Important Tax Benefits and Deductions for Massachusetts Homeowners

Owning a home in Massachusetts comes with several tax benefits and incentives that can save you money on both the state and federal level. Understanding these provisions is essential for homeowners looking to save money during this tax season. Here's a breakdown of some key tax benefits and IRS provisions for homeowners to be aware of.

*Please be advised that nothing in this article is intended to be used as specific tax advice. Lane, Lane & Kelly, LLP is not a certified Tax Specialist. For specific questions, please contact a qualified tax expert or accountant. The information in this article is intended for eduactional purposes only. 

1. Section 121: Capital Gains Exclusion on Home Sales

Under IRS § 121, if you sell your primary residence, you may exclude from your gross income any amount of gain up to:

• $250,000 for an individual taxpayer;
• $500,000 for married couples filing jointly.

To qualify, you must have owned and used the property as your primary residence for at least two out of the last five years before the transaction. This exclusion can provide substantial relief when selling a home in a competitive Massachusetts real estate market.

2. Mortgage Interest Deduction

Under IRS Section 163(h), homeowners who itemize deductions rather than taking the standard deduction can deduct mortgage interest on loans used to purchase, build, or substantially improve their primary residence. Section 163 specifically allows for what is called “qualified residence interest.” Qualified residence interest is defined as any interest which is paid or accrued on either, (i) the acquisition indebtedness with respect to any qualified residence, or (ii) home equity indebtedness with respect to any qualified residence. These two terms include interest on indebtedness relating to acquiring, constructing, or substantially improving your home, or on any debt borrowed against your home such as a home equity line of credit or home equity loan.

These deductions cannot exceed specific amounts, namely:

• The aggregate amount treated as acquisition indebtedness cannot exceed $750,000 (or $375,000 for married individuals filing separately or individual filers).

This deduction can significantly reduce taxable income, especially for new homeowners in high-cost areas.

3. The "Augusta Rule" for Rental Income

Homeowners can take advantage of the 14-Day Rental Rule (often referred to as the "Augusta Rule"), which allows you to rent out your primary residence for up to 14 days per year and exclude that rental income from your taxable income. This provision is found in §280A of the Federal tax code.

This allows you to use your very own home to generate tax-free income for yourself, and if you are a business owner, then a tax deduction for your business. Business owners that own their house can utilize this by leasing their home to their business. This can be done for purposes such as client meetings, employee meetings, member events, workshops, etc. You can lease your home to your business for up to 14 days for fair rental value. This allows you to deduct the entire lease expense as a business owner. And, as the homeowner, the rental income you receive from your business is tax-free.

This provision is particularly beneficial if you live in popular vacation areas in Massachusetts such as Cape Cod or the South Shore and wish to capitalize on using your home to generate rental income for a portion of the year. There is no income limit to the exemption either, but you must charge fair rental value for the use of your home. You also don’t have to rent out your home in 14 consecutive days. Just keep in mind that the total number of days using your home as a rental property cannot exceed 14 days total in one year in order to keep the rental income completely tax-free.

You may be asking, why is §280A of the Federal tax code called the Augusta rule? I don’t see the word Augusta used in the language of the provision? This section gets its nickname from Augusta, Georgia. The home of the annual Masters Golf Tournament which takes place at Augusta National in April. Due to the tournament’s popularity, hotels in the area would consistently book up, so Augusta residents would open up their homes to generate some rental income during the tournament. In the 1970’s these residents lobbied Congress to pass a provision to give them a tax break for renting out their primary homes. This resulted in the passing of §280A of the Federal tax code, and the nickname for the provision has stuck ever since. Despite commonly being referred to as the August rule, this tax advantage is available to all homeowners across the United States.

4. SALT Property Tax Deduction

The SALT tax stands for “State and Local Taxes.” Homeowners can deduct up to $10,000 in combined property taxes and state and local taxes (SALT) if they itemize deductions. This is often referred to as the $10,000 SALT deduction. This tax made headlines over the past few months during the 2024 Presidential election. During his first term in office, President Trump enacted the 2017 Tax Cuts and Jobs Act. As part of this legislature, he created this SALT deduction which set the maximum deduction amount at $10,000. As part of his 2024 campaign, he has promised to lift this SALT deduction. There have also been discussions around removing this deduction altogether. We will keep you updated as more information becomes available.

For many Massachusetts residents, especially in higher-tax areas, this can provide meaningful relief. As seen below, Massachusetts, and more specifically the east coast of Massachusetts, has some of the highest property taxes in the country.

*Chart sourced from TaxFoundation.org, data based on 2020 tax returns

Massachusetts-Specific Tax Credits

• Residential Energy Credit: If you own residential property and occupy the property as your principal residence, Massachusetts offers credits for installing energy-efficient systems. This is most frequently seen in the form of solar panels or wind systems. The credit you can claim is the lesser of (1) 15% of the total cost of the renewable energy source; or (2) $1,000.
• Lead Paint Removal Tax Credit: Homeowners can claim a credit for de-leading their residence in an amount that is the smaller of (1) the cost of the de-leading (removing or covering paint, plaster, or other construction materials that contain dangerous level of lead; or (2) $3,000.
• Septic System Repair Credit: If you own residential property and occupy the property as your principal residence, you can receive a credit for repairing or replacing a failed septic system or cesspool that complies with state sewer requirements. You can claim a credit of 60% of the cost of the repair/replacement, with a cap of $20,000. The total credit itself cannot exceed $18,000.

For other tax advantages for property owners in Massachusetts, please read our other legal blog posts below:

• Maximizing Tax Benefits with the Stepped-Up Basis in Estate Planning
• What is a 1031 Exchange? A Guide to the Tax Advantages & Estate Planning Benefits

Why Consult a Real Estate Attorney?

Navigating these tax benefits requires careful planning and documentation. A real estate attorney can help you:

• Maximize your deductions by ensuring compliance with IRS requirements.
• Act as your real estate attorney when either buying or selling property.
• Structure transactions to benefit from certain tax provisions.
• Advise on state-specific credits and other laws to keep front of mind.

By taking advantage of these benefits, homeowners can reduce their tax liabilities and maximize their most important asset, your home. For personalized guidance, contact our experienced real estate attorneys at Lane, Lane & Kelly, LLP. We're here to help you navigate complex real estate transactions and achieve your investment goals.