Tax Strategy

Homebuyer Tax Deductions: What You Can Write Off as a New Homeowner

Buying a home is the largest financial transaction most people ever make, and the U.S. tax code rewards homeownership with a meaningful set of deductions and credits. The mortgage interest deduction alone can shelter tens of thousands of dollars in income for high-balance borrowers, and property tax write-offs, points deductions, and energy-efficiency credits add further savings on top. But these benefits are not automatic — you have to know what qualifies, understand the limits, and choose the filing strategy that actually puts money back in your pocket. Here is a plain-language guide to every major homeowner tax benefit and how to make the most of them.

The Mortgage Interest Deduction

The mortgage interest deduction is the flagship homeowner tax benefit. It allows you to deduct the interest you pay on your mortgage from your taxable income, which can be a substantial amount — especially in the early years of a loan when the amortization schedule front-loads interest payments.

You can deduct interest on up to $750,000 of mortgage debt used to buy, build, or substantially improve your primary residence or a qualified second home. For mortgages originated before December 16, 2017, the limit is $1,000,000. If your loan balance exceeds the applicable cap, you can only deduct the proportionate share of interest that falls within the limit.

The deduction covers interest on your first and second mortgage, a home equity loan, or a home equity line of credit — as long as the proceeds were used to buy or improve the property. Interest on funds borrowed against home equity and used for other purposes (such as paying off credit cards) is not deductible.

To see exactly how much interest you will pay each year — and therefore how large this deduction could be — use our amortization schedule calculator. It shows a year-by-year breakdown of principal vs. interest, which is the number you will report on Schedule A.

The Property Tax Deduction

State and local property taxes paid on your primary residence and any second homes are deductible as part of the State and Local Tax (SALT) deduction. This deduction is combined with any state income taxes or sales taxes you pay, and the total is capped at $10,000 per year ($5,000 if married filing separately).

For homeowners in low-tax states with modest property values, this deduction may be straightforward to claim in full. For those in high-tax states like New York, California, or New Jersey — where property tax bills routinely exceed $10,000 on their own — the SALT cap will limit how much you can actually deduct, regardless of your total bill.

Property taxes paid through an escrow account are still fully deductible in the year they are actually remitted to the taxing authority, not necessarily in the year you made the escrow deposits. Your annual mortgage statement (Form 1098) will show the total taxes disbursed on your behalf, which is the figure to use when filing.

Mortgage Points Deduction

When you buy a home, you may pay discount points to reduce your interest rate — each point equals 1% of the loan amount and buys down the rate by a set amount. Points paid at closing on a purchase mortgage are generally fully deductible in the year you pay them, provided the loan is secured by your primary residence and the points are customary for your area.

The rules for refinances are stricter: points paid to refinance must be deducted gradually over the life of the new loan rather than all at once. For example, if you pay $3,000 in points on a 30-year refinance, you can deduct $100 per year ($3,000 ÷ 30). If you sell or pay off the loan early, any remaining undeducted points become deductible in that final year.

Points are reported on Form 1098 by your lender. If you paid them out of pocket at closing (rather than rolling them into the loan), they appear as a separate line item. Our mortgage calculator can help you evaluate whether paying points upfront makes financial sense compared to taking a higher rate and keeping cash in hand.

Energy-Efficiency Tax Credits

Unlike deductions — which reduce your taxable income — tax credits reduce your actual tax bill dollar for dollar, making them especially valuable. The Inflation Reduction Act expanded two key credits for homeowners who invest in energy-efficient upgrades.

Energy Efficient Home Improvement Credit

This credit covers 30% of the cost of qualifying upgrades such as energy-efficient exterior doors and windows, insulation, heat pumps, heat pump water heaters, and electrical panel upgrades needed to support those systems. The annual credit is capped at $1,200 for most upgrades combined, with a separate $2,000 cap for heat pumps and heat pump water heaters. You can claim the credit in multiple years as you spread improvements over time.

Residential Clean Energy Credit

This credit covers 30% of the cost of installing solar panels, solar water heaters, battery storage systems, small wind turbines, or geothermal heat pumps. There is no dollar cap on this credit — it applies to the full cost of the system, including installation — and any unused portion can be carried forward to future tax years.

Both credits apply to your primary residence and, for some technologies, to a second home you use but do not rent out. Keep all receipts and manufacturer certification statements, as you will need them to complete IRS Form 5695.

Home Office Deduction

If you are self-employed and use a portion of your home exclusively and regularly as your principal place of business, you may be eligible for the home office deduction. The deduction can be calculated using the simplified method (a flat $5 per square foot, up to 300 square feet) or the regular method (actual home expenses proportionate to the office's share of total home area).

The home office deduction can include a proportionate share of your mortgage interest, property taxes, homeowners insurance, utilities, and depreciation — expenses you are already incurring, now partially offsetting business income. The catch: W-2 employees cannot claim this deduction, even if their employer allows remote work. It is strictly limited to self-employed individuals and certain business owners. If this applies to you, our debt-to-income calculator can help you understand how self-employment income and deductions affect your overall financial picture when applying for a mortgage.

Capital Gains Exclusion When You Sell

When you eventually sell your home, the tax code provides a powerful benefit: you can exclude up to $250,000 of profit from capital gains tax if you are single, or $500,000 if you are married filing jointly. To qualify, you must have owned and used the home as your primary residence for at least two of the five years immediately before the sale.

This exclusion resets every two years, meaning if you sell a home, buy another, and sell again two or more years later, you can claim the exclusion again on the second sale. The exclusion applies to the gain — the difference between your sale price and your adjusted cost basis (purchase price plus qualifying improvements) — not the full sale proceeds.

Keeping records of home improvements throughout ownership is important because they increase your cost basis and reduce the taxable gain when you sell. Capital improvements — a new roof, an addition, a kitchen remodel — count. Routine maintenance and repairs do not.

Itemizing vs. Taking the Standard Deduction

All of the deductions above — mortgage interest, property taxes, and points — are only available if you itemize deductions on Schedule A instead of taking the standard deduction. The standard deduction for 2025 is $15,000 for single filers and $30,000 for married filing jointly. If your total itemized deductions do not exceed your standard deduction, you are better off taking the standard amount.

For many homeowners — particularly those with smaller loan balances, modest property taxes, or homes in low-rate environments — the standard deduction will be larger, and itemizing will not help. For those with large balances, high property taxes, or significant points paid at closing, itemizing can produce substantial savings.

A practical approach: tally your expected mortgage interest (from your amortization schedule), property taxes, and any points paid. If the total comfortably exceeds the standard deduction for your filing status, itemizing will benefit you. If it falls short, take the standard deduction and move on — you are still building equity, gaining appreciation, and enjoying the stability of homeownership without leaving money on the table.

Key Takeaways

The mortgage interest deduction covers interest on up to $750,000 of qualifying debt ($1,000,000 for pre-2018 mortgages) and is most valuable in the early years of a loan when interest payments are highest.
Property taxes are deductible as part of the SALT deduction, but the combined SALT cap of $10,000 limits the benefit for high-tax states.
Points paid on a purchase mortgage are generally deductible in full the year of closing; refinance points must be spread over the loan term.
Energy-efficiency credits — up to $1,200 annually for improvements and 30% of solar installation costs — reduce your tax bill directly and do not require itemizing.
The capital gains exclusion ($250,000 single / $500,000 married) shields most sellers from tax on home appreciation after two years of primary residence.
Itemizing only beats the standard deduction when your total eligible deductions exceed $15,000 (single) or $30,000 (married). Run the numbers before assuming itemizing helps you.

None of this replaces advice from a tax professional — your specific situation, state tax rules, and other deductions all interact in ways a single guide cannot capture. But understanding the framework means you will ask smarter questions and avoid leaving legitimate deductions unclaimed. And while you are planning your purchase, our affordability calculator can help you see how the total cost of homeownership — mortgage, taxes, insurance, and more — fits into your broader budget.