How Homeownership Changes Your Taxes: A Practical Guide to Deductions and Credits
Congratulations on buying a home. It's a major milestone—and it also means your tax situation is about to change significantly.
Many new homeowners are surprised to discover that homeownership opens up tax benefits they didn't have before. Deductions for mortgage interest, property taxes, and home improvements can meaningfully reduce your tax liability. But these benefits only work if you know about them and claim them correctly on your tax return.
This guide walks you through the key tax implications of homeownership so you can maximize your deductions and understand what forms you'll need.
Key Tax Benefits of Homeownership
Mortgage Interest Deduction
One of the biggest tax advantages of owning a home is the ability to deduct mortgage interest from your taxable income.
How it works: The interest portion of your mortgage payments can be deducted as an itemized deduction. This is especially valuable in the early years of your mortgage, when a much larger portion of each payment goes toward interest rather than principal.
Eligibility requirements:
- The loan must be used to purchase, build, or substantially improve your primary residence or second home
- The home must secure the loan
Loan balance limits:
- For mortgages taken out after December 15, 2017: You can deduct interest on balances up to $750,000 (married filing jointly) or $375,000 (married filing separately)
- For mortgages taken out before December 16, 2017: The limit is $1,000,000 (married filing jointly) or $500,000 (married filing separately)
What this means: If you have a $400,000 mortgage at 6% interest, you'll pay approximately $24,000 in interest the first year. That's a significant deduction that lowers your taxable income.
Property Tax Deduction
Property taxes paid on your home are deductible as part of your state and local taxes (SALT) deduction.
Recent changes: Tax law has shifted regarding SALT deductions. Currently, the deduction cap is $40,000 per year for married couples filing jointly (with indexing adjustments in future years). This represents an increase from the previous $10,000 cap.
What qualifies:
- Property taxes on your primary residence
- Property taxes on vacation homes or rental properties
- Real estate taxes paid through your mortgage escrow account
Important distinction: Real estate taxes (taxes on land and buildings) are different from property taxes (which can include taxes on vehicles or boats). Both types may be deductible as part of your SALT calculation.
Income phase-out: The SALT deduction begins to phase out for individuals with income above $500,000 ($250,000 if married filing separately).
Mortgage Points Deduction
When you take out a mortgage, you may have the option to pay "points" (also called discount points) upfront to your lender in exchange for a lower interest rate. Each point costs about 1% of your loan amount.
Tax benefit: Mortgage points can be deductible in the year you pay them, which reduces your taxable income upfront.
Requirements to qualify:
- The mortgage must be for your primary residence
- The loan must be secured by your home
- The points must be clearly itemized in your loan documents
- You cannot have borrowed the funds from the lender to pay the points
Understanding Itemization vs. Standard Deduction
One of the most important tax decisions homeowners face is whether to itemize deductions or take the standard deduction.
The Standard Deduction
The standard deduction is a fixed dollar amount that reduces your taxable income without requiring you to list individual deductions. The amount varies based on your filing status.
2025 Standard Deduction amounts:
- Married filing jointly: $31,500
- Single: $15,750
- Married filing separately: $15,750
- Head of household: $23,625
Itemized Deductions
Itemizing means listing out specific expenses that reduce your taxable income, such as:
- Mortgage interest
- Property taxes
- State and local income taxes
- Charitable donations
- Medical expenses
Which Should You Choose?
Compare the two amounts. Whichever is higher will result in lower taxes.
Example: Sarah is single and just bought a home. Her mortgage interest is $12,000 and property taxes are $9,000. Her total itemized deductions are $21,000.
Her standard deduction as a single filer is $15,750.
Since $21,000 is higher than $15,750, Sarah should itemize.
The general rule for homeowners: Most new homeowners benefit from itemizing because mortgage interest and property taxes often exceed the standard deduction. However, this varies based on your specific situation.
Home Improvements: What's Deductible and What Isn't
Homeowners often ask which home improvements offer tax benefits. The answer is more nuanced than you might expect.
Capital Improvements (Basis Adjustment)
Major home improvements that add value to your home—like a new roof, new kitchen, added room, or HVAC system—aren't directly deductible in the year you pay for them.
However, they increase your "basis" in the home, which reduces capital gains when you sell.
How this works: If you bought your home for $400,000 and made $50,000 in capital improvements, your basis becomes $450,000. When you sell the home for $500,000, your capital gain is only $50,000 (instead of $100,000).
The capital gains exclusion for homeowners is $500,000 (married filing jointly) or $250,000 (single), so this basis adjustment can save significant taxes on a future sale.
Home Office Deduction
If you're self-employed or work from home and use part of your home exclusively for business, you can deduct home office expenses.
Deductible expenses include:
- A proportional share of mortgage interest (based on percentage of home used for business)
- Property taxes (proportional)
- Utilities (proportional)
- Home insurance (proportional)
- Repairs and maintenance (proportional)
- Office equipment and supplies
How to calculate: Determine what percentage of your home is used for business (e.g., 10% of square footage), then apply that percentage to your home expenses.
Other Tax Advantages for Homeowners
Home Equity Loans and Lines of Credit
If you take out a home equity loan or HELOC and use the funds to improve your home, the interest may be deductible.
Important note: The HELOC debt counts toward your overall mortgage debt limit ($750,000 for mortgages after 2017, $1,000,000 for older mortgages).
IRA Withdrawal for First-Time Homebuyers
First-time homebuyers can withdraw up to $10,000 from a traditional or Roth IRA penalty-free to purchase a home. This exception applies only once per lifetime.
This doesn't mean the withdrawal isn't taxable—it's still ordinary income—but you avoid the 10% early withdrawal penalty.
State and Local Tax Credits
Some states offer first-time homebuyer tax credits or deductions. These vary widely by location, so check your state's tax authority website to see what programs you might qualify for.
Tax Forms You'll Need as a Homeowner
When you file taxes after buying a home, be prepared for some new forms:
Form 1040
Your primary income tax return. Any itemized deductions from Schedule A flow into this form.
Form 1098 (Mortgage Interest Statement)
Your mortgage lender sends this form if you paid $600 or more in mortgage interest during the tax year. It reports:
- Mortgage interest paid
- Points paid at closing
- Property taxes (if paid through escrow)
Schedule A (Itemized Deductions)
If you're itemizing, you'll use Schedule A to report:
- Mortgage interest
- Property taxes
- State and local income taxes
- Charitable donations
- Other eligible deductions
Form 8829 (Home Office Deduction)
Required if you claim a home office deduction.
Form 5695 (Energy Credits)
If you claim any energy-related tax credits for home improvements.
Form 5329 (Early IRA Withdrawal)
If you withdrew funds from an IRA for your home purchase.
Important Things to Keep Track Of
As a homeowner, maintaining good records is essential for tax purposes:
Keep documentation for:
- All mortgage statements showing interest and property taxes paid
- Receipts for home improvements
- Property tax bills
- Home office expense records (if applicable)
- Records of any energy-efficient upgrades
- Home sale documents (basis information for future reference)
Maintain these records for at least three years, ideally longer for mortgage and property tax documents.
The Bottom Line
Homeownership brings significant tax advantages, but only if you claim them correctly. The most important steps are:
- Determine if you should itemize. Compare itemized deductions to the standard deduction and choose whichever is higher.
- Track deductible expenses. Keep good records of mortgage interest, property taxes, and any eligible home improvements.
- Know your limits. Understand loan balance limits on mortgage interest and current SALT caps.
- Document everything. Your lender will send Form 1098, but you should maintain your own records as backup.
- Consider your total situation. Homeownership tax benefits work best when combined with other deductions. Your overall tax picture matters.
- Plan ahead. If you're considering major home improvements, understand the tax implications before you start.
Homeownership is rewarding both personally and financially—especially when you take advantage of the tax benefits available to you. File accurately, claim what you're entitled to, and enjoy the financial advantages of being a homeowner.