How Does Buying a House Affect Your Taxes? Deductions, SALT, and Sale

Buying a house affects your taxes in three main ways: it opens up itemized deductions for mortgage interest, property taxes, points, and mortgage insurance while you own; it lets you shelter a large chunk of profit from tax when you sell; and it gives first-time buyers a narrow break on tapping an IRA for the down payment. For the 2026 tax year, the mortgage interest deduction cap is back up to $1,000,000 of acquisition debt, the state and local tax deduction cap has jumped to $40,000, and two residential energy credits are gone. Whether any of this lowers your bill depends on one threshold question: do your itemized deductions beat the standard deduction?

Mortgage Interest Is Usually the Biggest Deduction

For 2026, you can deduct interest on up to $1,000,000 of acquisition debt across your primary home and a second home combined. Married filing separately, the cap is $500,000.¹ That is up from the $750,000 limit that applied from 2018 through 2025 under the Tax Cuts and Jobs Act.²

Acquisition debt means a mortgage you took out to buy, build, or substantially improve a home you own. An improvement counts as substantial if it adds value, extends useful life, or adapts the home to a new use. A kitchen remodel financed through your mortgage qualifies; a personal loan you happened to spend on furniture does not.²

Your lender sends Form 1098 each January showing the interest you paid the year before. If your balance exceeds the $1 million ceiling, you can still deduct a proportional share of the interest using that figure.³

Home Equity Loans and HELOCs

Starting in 2026, interest on home equity loans and HELOCs is once again deductible as qualified residence interest regardless of how you spend the money, as long as the loan is secured by a qualified residence.¹ From 2018 through 2025, that interest was deductible only when the borrowed funds went into the home securing the loan.² That restriction is gone.

Property Taxes and the SALT Cap

Property taxes paid to state and local governments are deductible on your federal return when you itemize. For 2026, the combined cap on all state and local taxes — property tax plus state income or sales tax — is $40,000 for single and joint filers, and $20,000 if you file separately.⁴ That is a large jump from the $10,000 cap in place from 2018 through 2025.

There is an income phase-down. If your modified adjusted gross income tops $500,000 ($250,000 if married filing separately), the cap starts shrinking, but it cannot fall below $10,000 ($5,000 if filing separately).⁵ For most homeowners, the higher ceiling means property taxes are much more likely to be fully deductible than they have been in recent years.

Not every local bill counts. Charges for specific services like trash pickup, water, or lawn-enforcement fines are not deductible property taxes.⁵ You deduct property taxes in the year you actually pay them, whether directly or through escrow.

Points, Closing Costs, and Mortgage Insurance

Mortgage points are prepaid interest you pay at closing to lower your rate. On a purchase mortgage for your primary residence, you can usually deduct the full cost of points in the year you pay them, as long as you paid them from your own funds rather than rolling them into the loan.⁶

Points paid on a refinance or on a second-home mortgage work differently. You spread the deduction evenly over the life of the loan.⁶ If you refinance again before the term ends, whatever remains of the unamortized points from the previous refinance becomes deductible in that year.

Other closing costs — appraisal fees, title insurance, legal fees, recording charges — are not deductible when you pay them. They get added to your home’s cost basis, which reduces taxable gain whenever you sell.⁵ Hold onto your settlement statement. It feeds a calculation you may not need for decades.

If you put less than 20% down on a conventional loan, your lender likely required private mortgage insurance.⁷ FHA and USDA loans have their own mortgage insurance premiums. Starting with the 2026 tax year, qualified mortgage insurance premiums are permanently deductible as mortgage interest, ending years of one-year extensions. The deduction is subject to income phase-out rules; historically the phase-out began at $100,000 of AGI and eliminated the deduction at $109,000 ($54,500 if married filing separately). Because the provision was restructured as permanent, check current IRS guidance or your Form 1098 instructions for the thresholds that apply to your filing year. Lenders report these premiums in Box 5 of Form 1098.⁸

Will You Actually Itemize?

None of these deductions lower your bill unless their total exceeds the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.⁹

A single filer with a $300,000 mortgage at 7% pays roughly $21,000 of interest in the first year, comfortably above the $16,100 standard deduction before any property tax is counted. A married couple with the same loan has a tighter case: $21,000 of interest plus $5,000 of property tax is $26,000, short of the $32,200 joint standard deduction. Add state income tax and they might clear it. They might not.

The math shifts every year. Early mortgage payments are heavily weighted toward interest, so the deduction is largest right after you buy and shrinks as the loan amortizes. Many owners itemize the first several years and take the standard deduction later.

Bunching Deductions

If you land near the itemizing threshold, one useful move is to stack deductible expenses into alternating years. Double up charitable contributions in one year and skip the next. Pay January’s property tax bill in December to combine two years of property tax into one calendar year. You itemize the loaded year and take the standard deduction the other year. Across two years, the total tax savings can beat splitting everything evenly.

The Payoff When You Sell

When you sell your primary residence, you can exclude up to $250,000 of gain if you’re single, or up to $500,000 if you file jointly.¹⁰ Many sellers owe no federal tax at all on the sale.

For the full exclusion, you must have owned the home and used it as your primary residence for at least two of the five years before the sale. The two years don’t have to be consecutive; any 24 months inside the five-year window count. For a joint return, both spouses must meet the residency test, but only one has to meet the ownership test.¹¹

Sell before the two-year mark and you may still get a partial exclusion if the move was driven by a job relocation, a health condition, or certain unforeseen circumstances. The partial exclusion is prorated based on how long you actually lived there.¹¹ This is where those closing costs you added to your basis pay off: a higher basis means a smaller gain, which makes staying under the exclusion cap easier.

Pulling From an IRA for the Down Payment

First-time homebuyers can withdraw up to $10,000 from a traditional IRA without the usual 10% early-withdrawal penalty.¹² The $10,000 is a lifetime limit, not an annual one, and you still owe regular income tax on the withdrawal. The penalty waiver is the only relief.

The IRS defines “first-time homebuyer” broadly: you qualify if you haven’t owned a home in the two years before the purchase. If you’re married and your spouse owned a home in that period, neither of you qualifies. The funds must be used to buy, build, or rebuild a home within 120 days of withdrawal.

Roth IRAs work differently. You can withdraw your own contributions any time without tax or penalty, because you already paid tax on that money. The $10,000 first-time buyer exception then applies to earnings withdrawn on top of contributions. The homebuyer penalty exception does not apply to 401(k) plans.

Energy Credits Are No Longer Available

Two residential energy tax credits expired at the end of 2025 and cannot be claimed for improvements placed in service in 2026 or later. The Energy Efficient Home Improvement Credit — 30% of the cost of heat pumps, windows, insulation, and similar upgrades, capped at $1,200 per year or $2,000 for heat pumps — applied only to work completed through December 31, 2025.¹³ The Residential Clean Energy Credit, which covered 30% of solar and other renewable installations with no annual dollar cap, also ended after 2025.¹⁴

If you installed solar in 2025 or earlier but couldn’t use the full credit because your tax liability was too low, the Residential Clean Energy Credit carries forward to 2026 and later years.¹⁴ You claim the carryforward on Form 5695.¹⁵ The Energy Efficient Home Improvement Credit had no carryforward, so any unused portion from 2025 is lost.

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
3
Internal Revenue Service. Form 1098 Mortgage Interest Statement
4
Internal Revenue Service. Topic No. 503, Deductible Taxes
5
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Consumer Financial Protection Bureau. What Is Private Mortgage Insurance?
8
Internal Revenue Service. Instructions for Form 1098 (12/2026)
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
10
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
11
Internal Revenue Service. Publication 523 (2025), Selling Your Home
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Energy Efficient Home Improvement Credit
14
Internal Revenue Service. Residential Clean Energy Credit
15
Internal Revenue Service. Instructions for Form 5695 (2025)