What tax breaks exist for homebuyers
Yes, but the breaks are narrower than most people think. The main one is the mortgage interest deduction, which lets you deduct the interest you pay on your mortgage from your taxable income — but only if you itemize deductions on your tax return instead of taking the standard deduction. A second option is the property tax deduction, which works the same way. A third, available only once in your lifetime, is the capital gains exclusion when you sell the house later, not when you buy it.
The catch: most homebuyers do not benefit from the mortgage interest deduction anymore. The standard deduction (the amount you can deduct without itemizing) is $13,850 for single filers and $27,700 for married couples filing jointly in 2024. Your mortgage interest plus property taxes plus state and local taxes combined have to exceed that number before itemizing saves you money. For many buyers, especially those with smaller mortgages or in lower-tax states, they do not.
Key Takeaways
- The mortgage interest deduction only helps if your total itemized deductions (mortgage interest, property taxes, and other deductible expenses) exceed the standard deduction, which is $27,700 for married couples and $13,850 for single filers in 2024.
- You cannot deduct principal payments on your mortgage, only the interest portion, and the deduction phases out on mortgages over $750,000.
- Property taxes are deductible but capped at $10,000 per year combined with state and local income taxes, regardless of how much you pay.
- The capital gains exclusion of up to $250,000 (or $500,000 if married) applies when you sell the house, not when you buy it, and requires you to have lived in the home for two of the last five years.
- First-time homebuyer credits and down payment assistance programs exist at the state and local level but are not federal tax deductions.
How the mortgage interest deduction actually works
When you pay your mortgage, part of each payment goes to interest and part goes to principal. Only the interest portion is deductible. In the first years of a 30-year mortgage, most of your payment is interest, so the deduction is larger. As years pass and you pay down principal, the interest portion shrinks and so does the deduction.
Your lender sends you a Form 1098 each January showing how much interest you paid the previous year. You report that number on Schedule A (the form for itemized deductions) when you file your taxes. But you only benefit if your total itemized deductions exceed the standard deduction. If they do not, you take the standard deduction instead and the mortgage interest deduction does you no good.
The deduction also has an income cap. If your mortgage is larger than $750,000, you can only deduct interest on the first $750,000 of the loan. This limit applies to mortgages taken out after December 15, 2017.
When itemizing deductions makes sense
Itemizing is worth doing if your mortgage interest, property taxes, state and local income taxes, charitable donations, and other deductible expenses add up to more than the standard deduction. For a married couple in 2024, that means your total deductions need to exceed $27,700.
Example: You have a $400,000 mortgage at 6.5% interest. In year one, you pay roughly $26,000 in interest. You also pay $8,000 in property taxes. That is $34,000 in deductions before any charitable giving or other expenses. Since $34,000 exceeds $27,700, itemizing saves you money. But if your mortgage is $200,000 and your property taxes are $4,000, your total is $13,000 — less than the standard deduction, so itemizing does not help.
Use the IRS worksheet or a tax software to calculate whether itemizing or taking the standard deduction saves you more money in your specific situation. The answer changes based on your income, your state, and your mortgage size.
Property tax deductions and the $10,000 cap
Property taxes are deductible as part of itemized deductions, but there is a hard cap: you can deduct no more than $10,000 per year in combined state and local taxes (SALT). This includes state income tax, local income tax, and property tax. If you live in a high-tax state and pay $15,000 in property taxes alone, you can only deduct $10,000 of it.
This cap has been in place since 2017 and is set to expire after 2025 unless Congress extends it. Check the current tax year rules before filing, as this may change.
Capital gains exclusion when you sell
This is the tax break that actually helps most homeowners, but it happens when you sell, not when you buy. If you own and live in your home for at least two of the last five years, you can exclude up to $250,000 of profit from your taxable income (or $500,000 if you are married filing jointly). This applies only once every two years.
Example: You buy a house for $300,000 and sell it eight years later for $500,000. Your profit is $200,000. Because you lived there for more than two years, you owe no federal tax on that $200,000. If you were married, you could exclude up to $500,000, so you would owe nothing on a profit up to that amount.
This exclusion is not a deduction — it is an outright exemption from tax on the gain. It is one of the largest tax breaks available to homeowners, but it only applies to the profit when you sell.
State and local homebuyer tax credits
Some states and cities offer tax credits or deductions for first-time homebuyers or for buying in certain neighborhoods. These are not federal programs and vary widely. A few examples: some states offer a credit for mortgage interest paid in the first year, some offer a credit for property taxes, and some offer credits for buying in designated areas.
Check your state revenue or taxation department website and your city or county assessor's office to see what programs exist where you live. These credits are often one-time only and have income limits. They are separate from the federal deductions described above.
Down payment assistance is not a tax deduction
If you receive down payment assistance from a government program, a nonprofit, or an employer, that money is generally not taxable income and does not create a tax deduction. It simply reduces the amount you have to borrow. Some programs do have tax implications — for example, if forgiveness of a loan is involved — so check the terms of your specific program with a tax professional.
Down payment assistance programs are a housing benefit, not a tax benefit. They help you afford the purchase but do not show up on your tax return.
Frequently Asked Questions
Can I deduct closing costs or the down payment?
No. Closing costs and your down payment are not deductible. Only the interest portion of your mortgage payments and your property taxes are deductible (subject to the limits described above). The principal you pay down and the costs to buy the house are considered part of your investment in the property.
What if I paid points to lower my interest rate?
Points (also called loan origination fees) paid to reduce your mortgage interest rate are deductible, but only over the life of the loan. If you paid $6,000 in points on a 30-year mortgage, you deduct roughly $200 per year. If you pay off the mortgage early or refinance, you can deduct the remaining points in the year you pay it off.
Do I lose the mortgage interest deduction if I refinance?
No. You continue to deduct the interest on your new mortgage the same way you did on the old one. The deduction applies to whichever mortgage you currently have. If you refinance into a smaller loan, your interest payments will be smaller, so your deduction will be smaller.
Can I deduct homeowners insurance or HOA fees?
No. Homeowners insurance, HOA fees, utilities, maintenance, and repairs are not deductible for a primary residence. They are only deductible if you rent out the property or use part of it for business.
What happens to my deductions if I pay off my mortgage early?
Once you pay off the mortgage, you no longer pay interest, so you no longer have a mortgage interest deduction. Your only remaining deduction would be property taxes (subject to the $10,000 SALT cap). This is one reason some people keep a mortgage longer than they otherwise would — to preserve the deduction — though whether that makes financial sense depends on your interest rate and tax situation.