Buying A Home: Tax Benefits

Mortgage interest on debt up to $750k (new loans post-12/16/17; old loans: $1M) is deductible. Requires itemizing deductions (the 2026 standard deduction is $32,200 MFJ). Example: a $500k mortgage at 6% means about $30k of interest. Add $10k of property tax and you have $40k itemized, $7,800 more than the standard deduction, which saves about $1,872 at a 24% rate. Itemize only if total itemized deductions exceed $32,200.

State and Local Tax (SALT) cap: the OBBBA raised the cap to $40,000 for 2025 and $40,400 for 2026 ($20,200 MFS), rising 1% a year through 2029, phasing down by 30% of modified AGI above $505,000 toward a $10,000 floor, and reverting to $10,000 in 2030. Covers state income tax (or sales tax) plus property taxes. High-tax states (CA, NY, IL, NJ) benefit most from the higher cap; owners of multiple properties can still hit it.

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.

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.

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).

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.

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.

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.

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.

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.