What tax breaks exist for homebuyers
You may reduce your federal income tax through two main routes: deductions on your mortgage interest and property taxes, or a one-time credit if you are a first-time buyer. The deduction applies every year you own the home and pay those expenses. The credit is a one-time payment from the IRS, available only in certain years and only to buyers meeting specific conditions.
These are not automatic. You must itemize deductions on your tax return to claim mortgage interest and property taxes — most people do not, because the standard deduction is larger. A first-time buyer credit, when available, requires you to report it on your return and meet income limits set by Congress.
The rules change by year and depend on your income, the loan amount, and the state where you buy. No tax break applies to the down payment itself or to closing costs.
Key Takeaways
- Mortgage interest and property taxes can reduce your taxable income only if you itemize deductions, which most homebuyers do not do because the standard deduction is larger.
- A first-time homebuyer credit, when Congress makes it available, is a direct payment from the IRS rather than a deduction, but it has income limits and applies only in the year you buy.
- The mortgage interest deduction applies only to loans of $750,000 or less (or $1 million for loans taken out before December 16, 2017), and only on your primary home or one other residence.
- State and local property taxes are deductible only up to $10,000 per year combined with other state and local taxes, regardless of how much you actually pay.
- Down payments, closing costs, and homeowners insurance do not reduce your federal income tax.
How the mortgage interest deduction works
If you itemize deductions on your federal tax return, you can deduct the interest portion of your mortgage payments. This is the amount that goes toward interest, not the amount that goes toward paying down the loan balance — your lender sends a form called a 1098 each January showing how much interest you paid that year.
The deduction applies only to loans of $750,000 or less on your primary home or one other residence. If you took out your mortgage before December 16, 2017, the limit is $1 million. The interest on home equity loans or lines of credit is no longer deductible unless you use the borrowed money to build or improve the home.
Most homebuyers do not claim this deduction because the standard deduction — a flat amount the IRS allows everyone — is larger than their itemized deductions would be. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. You must add up all your itemized deductions (mortgage interest, property taxes, charitable donations, and a few others) and compare the total to the standard deduction. You claim whichever is larger.
Property tax deductions and the $10,000 cap
Property taxes you pay on your home are deductible if you itemize, but only up to $10,000 per year combined with other state and local taxes (income tax, sales tax, or any mix of these). This cap applies regardless of how much you actually pay in property taxes.
In high-tax states, this limit means many homeowners cannot deduct all their property taxes. If you pay $15,000 in property taxes and $5,000 in state income tax, you can deduct only $10,000 total, not the full $20,000. The cap has been in place since 2018 and is set to expire after 2025 unless Congress extends it.
This deduction also requires you to itemize. If your standard deduction is larger than your itemized deductions, you will not use the property tax deduction at all.
First-time homebuyer credits when they are available
Congress occasionally creates a tax credit for first-time homebuyers, but these are not permanent. A credit is different from a deduction: it reduces your tax bill dollar-for-dollar rather than reducing your taxable income. A $5,000 credit saves you $5,000 in taxes owed.
The most recent federal first-time buyer credit expired in 2010. Some states offer their own credits or deductions for homebuyers — these vary widely by state and change over time. A few states have no homebuyer tax benefit at all. You would need to check your state's tax authority website to learn what is currently available in your state.
When a federal credit does exist, it typically has income limits (often $75,000 to $95,000 for single filers, higher for married couples) and applies only in the year you buy. You claim it on your federal tax return by filing the required form.
What does not get a tax break
Your down payment is not deductible, even if you borrowed it. Closing costs — including appraisal fees, title insurance, attorney fees, and loan origination fees — are not deductible. Homeowners insurance premiums are not deductible. Property improvements and repairs are not deductible (though they may increase your home's basis for capital gains purposes if you sell later).
Points paid to lower your mortgage rate are deductible, but only if you meet specific conditions: the loan must be for your primary residence, the points must be a standard charge in your area, and the amount must be clearly shown on your closing disclosure. Points paid on a refinance are deducted over the life of the new loan, not all in one year.
Comparing itemizing versus taking the standard deduction
To know whether you benefit from the mortgage interest and property tax deductions, add up all your itemized deductions and compare the total to the standard deduction for your filing status. Itemized deductions include mortgage interest, property taxes (capped at $10,000), charitable donations, medical expenses above a threshold, and a few other items.
If you are married filing jointly and your itemized deductions total $28,500, you would itemize because $28,500 is more than the 2024 standard deduction of $29,200 — but only barely. If they total $32,000, you would itemize and save the difference in taxes. If they total $27,000, you would take the standard deduction instead.
This calculation changes year to year as your income, property taxes, and mortgage balance shift. In early years of a mortgage, when interest payments are highest, you are more likely to have enough deductions to itemize. Later, as the interest portion shrinks, you may fall below the standard deduction.
Capital gains exclusion when you sell
This is not a tax break on the purchase, but it matters later: when you sell your home, you may exclude up to $250,000 of profit from your taxable income (or $500,000 if you are married filing jointly). This exclusion applies if you owned and lived in the home for at least two of the five years before the sale.
This is separate from any deduction or credit you claimed when you bought. It is a benefit that applies to the sale, not the purchase.
Frequently Asked Questions
Can I deduct my down payment?
No. Down payments are not deductible on your federal income tax return, whether you paid it from savings or borrowed it. Only the interest on your mortgage loan is deductible, and only if you itemize deductions.
Do I have to itemize to get any tax break from buying a house?
For mortgage interest and property taxes, yes — you must itemize. If a first-time buyer credit is available in your state or federally, you claim it separately and do not need to itemize. But most homebuyers do not itemize because the standard deduction is larger.
What if I pay off my mortgage early?
You lose the mortgage interest deduction for the years after you pay it off, because you no longer have mortgage interest to deduct. This is one reason some people factor the tax deduction into their decision about whether to pay off a mortgage early.
Does refinancing give me a new tax break?
Refinancing does not create a new tax break. You continue to deduct mortgage interest on the new loan the same way you did on the old one. Points paid on a refinance are deducted over the life of the new loan, not all in the year you refinance.
Are there tax breaks for buying a second home or investment property?
Mortgage interest on a second home is deductible under the same rules as your primary home. Mortgage interest on an investment property is not deductible as a personal tax break, but it may be deductible as a business expense if you rent the property — that is a different calculation handled on Schedule E of your tax return.