What is the SALT cap and how does it affect property taxes?

State and Local Tax (SALT) cap: maximum $10k deductible per year. Covers state income tax + property taxes + sales tax (choose one income tax method). Cap applies through 2025; expires 1/1/26 (may extend). High-tax states (CA, NY, IL, NJ): SALT cap means $10k property tax deductible max, rest non-deductible. Two-property owners hit cap quickly.

Can I deduct the $10,000 purchase closing costs?

Some yes, some no. Points (discount points to lower rate): deductible if paid to lower rate (amortize over loan term if not for purchase). Appraisal, inspection, title insurance, recording fees, transfer taxes: not deductible (capitalized into basis). Loan origination fees: not deductible. Ask your CPA which costs are deductible in your situation.

Is the first-time homebuyer credit still available?

First-time homebuyer tax credit was temporarily available in 2008-2010 ($8k credit). Expired; no current federal credit. However, some states offer programs (CA, NY, IL have state-level down payment assistance). Check with your state housing authority. No federal credit currently; be cautious of "tax credit" claims.

Can I deduct the $3,500 Home Inspection / PMI premiums?

Home inspection: not deductible (capitalized into purchase basis). PMI (Private Mortgage Insurance): recent rules allow deduction if financed with loan to value over 80% (not down payment). Deductible as mortgage interest alternative. PMI deduction subject to income limits (phases out at $160k single, $240k MFJ 2026).

What is home office deduction and am I eligible?

Home office deduction available if you use dedicated space regularly for business. Two methods: (1) simplified: $5/sq ft (max 300 sq ft = $1.5k/year). (2) Regular method: actual expenses (utilities, depreciation, mortgage interest, property tax, insurance, repairs). Deduction prorated by home office % of total home. Requires qualifying business use.

Can I deduct rental income from a second home?

Rental income is taxable. You can deduct rental expenses: mortgage interest, property taxes, insurance, utilities, maintenance, depreciation. If personal use (you stay there over 14 days/year OR over 10% of rental days), phase-out rules limit deductions. Pure rental (no personal use): standard rental property treatment.

What is the $250k/$500k capital gains exclusion on home sale?

Section 121 exclusion: $250k single, $500k married filing jointly, on capital gains from home sale if owned + used as primary residence 2 of last 5 years. Example: bought $300k, sold $800k. Gain: $500k. Exclusion: $500k MFJ. Taxable gain: $0. Use exclusion once every 2 years. Critical: primary residence requirement.

Can I avoid capital gains tax if I reinvest home sale proceeds?

No. Like-kind exchanges (1031) don't apply to personal residence sales. You must rely on Section 121 exclusion. If gain exceeds exclusion, capital gains tax applies. Example: gain $750k, exclusion $500k, taxable gain $250k. Taxed at 15% or 20% rate = $37.5k-$50k federal tax. Reinvestment doesn't avoid tax.

What about deducting home improvement costs?

Home improvements (new roof, addition, renovation): not currently deductible. Capitalized into basis. When you sell, use improved basis to calculate capital gains (lower gains). Repairs (fixing existing, maintenance) also not deductible but capitalized. Deduction comes at sale via reduced capital gains. Never deductible in year incurred.

Buying A Home: Tax Benefits

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A guide by Taxstra Tax & Accounting · CPA-led tax strategy for business owners

Your Guide

01Mortgage Interest Deduction 02SALT Cap & Property Taxes 03PMI & Closing Costs 04Home Office Deduction 05Home Improvements & Basis 06Section 121 Exclusion 0710-Year Financial Comparison 08Comparison Table

Mortgage Interest Deduction

Deductible on loans up to $750k principal

Mortgage interest is deductible on debt up to $750,000 (for loans originated after December 16, 2017; older loans: $1M limit) secured by your home. To claim, you must itemize deductions (standard deduction is $29.2k MFJ 2026). Many homeowners don't itemize because standard deduction exceeds mortgage + property tax deductions.

Key Insight

Mortgage Interest Deduction Example

Home price: $500k. Mortgage: $400k at 6% interest. Year 1 interest: $24k. If itemizing, deduction: $24k. Tax saving: $24k × 24% = $5,760/year. Over 30 years (declining), cumulative saving: ~$90k (vs $0 if standard deduction exceeds itemized).

The key decision: itemize or take standard deduction? Standard deduction (2026): $29.2k MFJ. Itemized deductions: mortgage interest ($24k) + property tax ($10k SALT cap) = $34k. Result: itemize ($34k exceeds $29.2k standard). Gain: $4,800 deduction × 24% = $1,152/year.

Taxstra CPA Tip

Bunching Strategy for Itemization

If mortgage interest + SALT cap hit ~$28k-$29k (close to standard), consider "bunching" deductions. Prepay next year's property tax in December (itemize year 1 with bunched deduction). Skip deductions in year 2 (take standard deduction). Alternate years maximize total deductions over 2 years.

Watch Out

Homeowners Often Don't Itemize

High standard deduction ($29.2k MFJ) means many homeowners can't exceed it with mortgage + property tax. Example: $400k mortgage at 6% = $24k interest. Add $10k property tax (SALT cap) = $34k itemized. Advantage over standard: $4.8k deduction = $1.15k tax savings. Modest benefit; many homes don't justify itemizing.

SALT Cap & Property Taxes

$10k annual limit on state/local taxes (through 2025)

The State and Local Tax (SALT) cap limits deduction to $10k/year. Covers state income tax + property taxes + sales tax (elect one). Applies through 2025; may expire Dec 31, 2025 (Congress may extend). For homeowners in high-tax states (CA, NY, IL, NJ), the cap is painful: property tax alone often exceeds $10k.

Key Insight

SALT Cap Impact Example

Home value: $1M in San Francisco. Property tax (1.25% CA): $12.5k/year. Cap: $10k deductible. Loss: $2.5k/year × 24% bracket = $600/year in tax. Over 20 years: $12k in non-deductible tax. Homeowners in CA, NY, NJ, IL hit cap frequently.

Two-property owners (primary + vacation home): combined property taxes on both hit cap even faster. Example: primary home $800k (CA), vacation home $400k (CO). Combined property taxes: ~$12k CA + $2k CO = $14k. Capped at $10k. Non-deductible: $4k × 24% = $960/year loss.

Taxstra CPA Tip

SALT Cap Expiration Planning

If SALT cap expires 12/31/25 (decision pending in Congress), deductions return to unlimited in 2026. High-property-tax homeowners: monitor tax law. If cap expires, consider deferring property tax payments to 2026 to claim unlimited deduction. Consult CPA in November 2025.

PMI & Closing Costs

Deductibility of mortgage insurance and purchase fees

Private Mortgage Insurance (PMI): required when down payment is under 20%. If financed into mortgage (not paid at closing), PMI may be deductible as mortgage insurance (similar to mortgage interest deduction). Subject to income limits: phases out at $160k single, $240k MFJ (2026).

Key Insight

PMI Deduction Example

Home: $400k. Down payment: 5% ($20k). Financed mortgage: $380k. PMI: $15k (amortized). Deductible PMI (recent rule): up to $1.5k/year if income under threshold. Tax saving: $1.5k × 24% = $360/year. Phases out above $160k/$240k.

Closing costs: mostly not deductible. Points (discount points, loan origination fees): deductible if used to buy down interest rate (amortized over loan term) or non-deductible if financing fees. Appraisal, inspection, title insurance, recording fees: capitalized into basis, recovered at sale via reduced capital gains.

Watch Out

Closing Cost Capitalization

$15k closing costs (appraisal $500, inspection $400, title $1.2k, attorney $2.5k, recording $300, origination $2k, transfer tax $8k): capitalized into basis. You don't deduct in year 1. At sale, use improved basis (original price + closing costs) to calculate capital gains (lower gains = lower tax).

Home Office Deduction

If using dedicated space for business

Home office deduction available if you use a dedicated space regularly for business (self-employed, business owner, or employee with home office). Two methods: simplified ($5/sq ft, max 300 sq ft = $1.5k/year) or regular (actual expenses: utilities, depreciation, mortgage interest, property tax, insurance, repairs).

Taxstra CPA Tip

Simplified Home Office Method

300 sq ft home office × $5/sq ft = $1.5k/year deduction (cap). No depreciation recapture at sale. Easy tracking. Best for smaller offices. Does not require itemization; deductible against business income.

Regular method: allocate all home expenses by square footage. Example: 4,000 sq ft home, 400 sq ft office = 10% allocation. Mortgage interest ($24k) × 10% = $2.4k deductible. Property tax ($10k SALT cap) × 10% = $1k deductible. Insurance ($2k) × 10% = $200. Depreciation: depreciate 10% of home value annually (triggers recapture tax at sale).

Watch Out

Depreciation Recapture on Home Sale

Using regular home office method triggers depreciation recapture. If you depreciate $5k over 5 years and sell home, you owe 25% recapture tax on $5k = $1.25k tax. Compare this to potential home office deductions ($3k-$5k/year). For most homeowners, simplified method is better (avoids recapture).

Home Improvements & Basis

Capitalization and recovery at sale

Home improvements (new roof, addition, renovation, HVAC) are capitalized into your cost basis. Not deductible in year incurred. Cost basis increases by improvement cost. At sale, capital gains = sale price - (original cost + improvements).

Taxstra CPA Tip

Home Improvement Basis Example

Bought home: $300k. Renovated kitchen: $50k. New roof: $15k. Cost basis: $365k. Sold 5 years later for $450k. Capital gains: $450k - $365k = $85k (vs $150k if no improvements). Section 121 exclusion ($500k MFJ): $85k taxable = $0 tax (under exclusion). Improvements reduced gain, saved capital gains tax.

Repairs vs improvements: repairs (fixing existing, maintenance) vs improvements (adding value, new systems). Roof repair $2k: repair (no deduction, not capitalized). New roof $15k: improvement (capitalized). The distinction matters: capital vs expensed.

MetricHome Purchase Price / Basis

RenterN/A (renting)

HomeownerPurchase price + closing costs capitalized. Cost basis for future sale.

MetricAnnual Mortgage Interest Deduction

Renter$0 (rent not deductible)

HomeownerUp to $750k debt limit: $750k × 6% = $45k deductible (if itemizing)

MetricAnnual Property Tax Deduction (SALT Cap)

Renter$0 (rent not deductible)

HomeownerUp to $10k/year (federal cap through 2025, may extend or expire)

MetricHomeowner Insurance / HOA

RenterRenters insurance: ~$15-25/month ($180-300/year); not deductible

HomeownerHomeowner insurance: ~$100-200/month ($1.2k-2.4k/year); not deductible

MetricMaintenance / Repairs

RenterLandlord maintains; no cost to renter

HomeownerYour responsibility; roof, HVAC, plumbing: $500-$2k/year; not deductible

MetricHome Improvement Investments

RenterNone; can't improve rental property

HomeownerNew roof $12k, addition $50k, etc. capitalized into basis (recovered at sale)

MetricCapital Gains on Sale (After 2 Years)

RenterN/A (no property to sell)

HomeownerSection 121 exclusion: $250k single, $500k MFJ. Gain over exclusion taxed 15%-20%

MetricPMI Deduction (If Over 80% LTV)

RenterN/A

HomeownerPMI deductible if financed; phases out at $160k single, $240k MFJ (2026)

MetricHome Office Deduction (If Applicable)

RenterCan deduct home office if renting (office % of rent non-deductible)

HomeownerDeductible: simplified $5/sq ft (300 sq ft max = $1.5k/year) or actual expenses

Metric10-Year Housing Cost Comparison: $400k Purchase, 3% Down

RenterRent $2k/month × 120 months = $240k out-of-pocket (zero equity, zero tax benefits)

HomeownerMortgage $388k at 6%, taxes/insurance $4.8k/year, upkeep $8k/year. Total cash out: $350k over 10 years. Remaining mortgage: $280k. Home value (assume 3% appreciation): $537k. Equity: $257k. Tax benefits: ~$85k (mortgage interest + property tax deductions).

MetricLiquidity

RenterLiquid; move easily; no sale process

HomeownerIlliquid; 30-60 days to sell; selling costs 5-7% of sale price

Metric	Renter	Homeowner
Home Purchase Price / Basis	N/A (renting)	Purchase price + closing costs capitalized. Cost basis for future sale.
Annual Mortgage Interest Deduction	$0 (rent not deductible)	Up to $750k debt limit: $750k × 6% = $45k deductible (if itemizing)
Annual Property Tax Deduction (SALT Cap)	$0 (rent not deductible)	Up to $10k/year (federal cap through 2025, may extend or expire)
Homeowner Insurance / HOA	Renters insurance: ~$15-25/month ($180-300/year); not deductible	Homeowner insurance: ~$100-200/month ($1.2k-2.4k/year); not deductible
Maintenance / Repairs	Landlord maintains; no cost to renter	Your responsibility; roof, HVAC, plumbing: $500-$2k/year; not deductible
Home Improvement Investments	None; can't improve rental property	New roof $12k, addition $50k, etc. capitalized into basis (recovered at sale)
Capital Gains on Sale (After 2 Years)	N/A (no property to sell)	Section 121 exclusion: $250k single, $500k MFJ. Gain over exclusion taxed 15%-20%
PMI Deduction (If Over 80% LTV)	N/A	PMI deductible if financed; phases out at $160k single, $240k MFJ (2026)
Home Office Deduction (If Applicable)	Can deduct home office if renting (office % of rent non-deductible)	Deductible: simplified $5/sq ft (300 sq ft max = $1.5k/year) or actual expenses
10-Year Housing Cost Comparison: $400k Purchase, 3% Down	Rent $2k/month × 120 months = $240k out-of-pocket (zero equity, zero tax benefits)	Mortgage $388k at 6%, taxes/insurance $4.8k/year, upkeep $8k/year. Total cash out: $350k over 10 years. Remaining mortgage: $280k. Home value (assume 3% appreciation): $537k. Equity: $257k. Tax benefits: ~$85k (mortgage interest + property tax deductions).
Liquidity	Liquid; move easily; no sale process	Illiquid; 30-60 days to sell; selling costs 5-7% of sale price

Frequently Asked Questions

10 homeowner tax questions answered

Mortgage interest on debt up to $750k (new loans post-12/16/17; old loans: $1M) is deductible. Requires itemizing deductions (standard deduction is $29.2k MFJ 2026). Example: $500k mortgage at 6% = $30k annual interest deductible. Tax saving: $30k × 24% = $7,200/year. Compare to standard deduction; itemize only if total itemized deductions exceed $29.2k.

More Life-Event Tax Guides

Selling Your Home: Tax Guide →Should You Sell or Rent Your Old House? →Getting Married: Tax Guide →New Parent Tax Guide →Getting Divorced: Tax Guide →Losing a Spouse: Tax Guide →Winning the Lottery: Tax Guide →

Optimize Your Homeowner Tax Strategy

Mortgage interest, SALT cap planning, home office deduction, and Section 121 exclusion planning can save $2k-$10k annually. Get personalized advice based on your purchase price, location, and business use.

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