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

Buying a house changes your taxes by opening a set of itemized deductions renters cannot claim — chiefly mortgage interest, property taxes, and mortgage points — and by setting you up for a large tax-free gain when you eventually sell. None of it helps, though, unless those housing costs together exceed the standard deduction for your filing status. That is the first calculation to run, and it decides whether homeownership actually lowers your federal tax bill in a given year.

Itemizing Is the Gatekeeper

Every housing deduction below requires you to itemize on Schedule A instead of taking the standard deduction. You get one or the other, whichever is larger.¹

For 2026, the standard deduction is $16,100 for single filers and married filing separately, $32,200 for married filing jointly and surviving spouses, and $24,150 for heads of household.² Your mortgage interest, property taxes, points, and other eligible costs have to add up to more than that figure before itemizing puts a dollar back in your pocket. Hold on to receipts and year-end statements so you can run the comparison honestly at filing time.

Mortgage Interest

Mortgage interest is the biggest deduction most homeowners will claim. On loans taken out after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt, or $375,000 if you are married filing separately. Loans that closed on or before that date keep the older cap of $1,000,000, or $500,000 for married filing separately.³

The debt has to be secured by your primary home or one designated second home you are not renting out most of the year. The IRS defines a home broadly enough to include a condo, co-op, mobile home, boat, or RV, as long as it has sleeping, cooking, and toilet facilities.⁴

Your lender sends Form 1098 in January reporting the interest you paid.⁵ Box 1 is the number that goes on Schedule A.

Home Equity Loans and HELOCs

Interest on a home equity loan or line of credit is deductible only if you used the money to buy, build, or substantially improve the home securing it.³ Using a HELOC to pay off credit cards or buy a car does not qualify. Keep contractor invoices in case the IRS asks how the borrowed funds were spent.

Property Taxes and the SALT Cap

Local property taxes are deductible when you itemize, but they fall under the state and local tax (SALT) cap. For 2026 the cap is $40,400 for most filers and $20,200 for married filing separately, a large jump from the $10,000 limit that applied from 2018 through 2024. The cap rises one percent per year through 2029 and then reverts to $10,000 in 2030.

That cap covers your property taxes combined with either your state income tax or state sales tax, whichever is higher. You cannot claim both. Homeowners with income above roughly $505,000 in 2026 see the cap phased down at a 30 percent rate, potentially back to $10,000.

Timing catches new buyers off guard. The deduction lands in the year your local tax authority actually receives the payment, not the year you funded escrow. If you closed late in the year, your servicer may not remit the first tax bill until January, pushing the deduction into the following return. Check the year-end escrow statement from your lender to confirm the disbursement dates.

Points and Closing Costs

Discount points are prepaid interest you buy at closing to lower your rate, usually one percent of the loan per point. If you paid points to purchase your primary home and they were calculated as a percentage of the loan, you can typically deduct the full amount in the year of purchase, as long as the charge is customary in your area and not excessive.⁶

Points paid on a refinance work differently. You spread the deduction evenly across the life of the new loan.⁴ Two points ($4,000) on a 30-year refinance yields roughly $133 a year.

When the seller pays your points as part of the deal, the IRS still treats you as the payer and lets you deduct them in the year of purchase. You then have to reduce your home’s cost basis by the same amount, which may increase your taxable gain later.⁷

The rest of your closing costs are not deductible in the purchase year. Appraisal fees, title insurance, legal fees, recording fees, transfer taxes, and surveys are treated as part of the cost of acquiring the property. Many of them get added to your cost basis, which reduces the taxable gain when you sell:

Legal fees for title searches, contract preparation, and deed recording
Owner’s title insurance premiums
State or local real estate transfer taxes
Recording fees for the deed and mortgage
Property survey costs

Costs tied to obtaining the loan itself, such as the lender’s appraisal, credit report fee, and loan assumption fees, cannot be added to basis.⁷ Use your closing disclosure to separate basis items from loan-origination items and file it with your permanent tax records.

Mortgage Insurance Premiums

If your down payment was under 20 percent, you are probably paying private mortgage insurance. The One Big Beautiful Bill Act, signed in 2025, permanently reinstated the rule that treats qualifying mortgage insurance premiums as deductible interest.³ The deduction was unavailable for premiums paid from 2022 through 2025, and returns for 2026 forward.

It phases out with income. For each $1,000 of adjusted gross income (or fraction of $1,000) above $100,000, the deduction drops by 10 percent, disappearing entirely above $110,000. Married filing separately phases out between $50,000 and $55,000.⁸ Only contracts issued on or after January 1, 2007 qualify. Premiums appear on the same Form 1098 as your mortgage interest.

Home Office Deduction (Self-Employed Only)

If you are self-employed and use part of your new home exclusively and regularly for business, you can deduct a share of mortgage interest, property taxes, utilities, insurance, and repairs tied to that space.⁹ Exclusive means exclusive: a room that doubles as a guest room or playroom does not qualify.

W-2 employees who work from home cannot claim this deduction under current law. Only self-employed filers qualify.

You can use the simplified method, worth $5 per square foot up to 300 square feet ($1,500 maximum), or calculate actual expenses based on the business-use percentage of your home.¹⁰ The actual-expense method takes more recordkeeping and usually produces the larger deduction.

The Payoff When You Sell

Buying now sets up a substantial break years later. When you sell your primary residence, you can exclude up to $250,000 of profit from federal tax, or $500,000 for a married couple filing jointly.¹¹ Profit is the sale price minus your cost basis, which is the purchase price plus qualifying improvements and the closing costs mentioned above.

To qualify, you must have owned and used the home as your principal residence for at least two of the five years before the sale. The two years do not need to be consecutive; 24 months or 730 days of combined ownership and use inside the five-year window is enough.¹² You can use the exclusion once every two years.

This is why the recordkeeping matters. Every renovation receipt and every non-deductible closing cost that increased your basis is a dollar less of taxable gain later. Start a folder the day you close.

Energy Credits Ended After 2025

If you were counting on tax credits for solar panels, heat pumps, or energy-efficient windows, note that the Residential Clean Energy Credit (30 percent of costs) and the Energy Efficient Home Improvement Credit (up to $3,200 per year) were both terminated for property placed in service after December 31, 2025.¹³¹⁴ Improvements you made in 2025 can still be claimed on that year’s return, but installations from 2026 forward do not qualify.

1
Internal Revenue Service. About Schedule A (Form 1040), Itemized Deductions
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
3
Office of the Law Revision Counsel. 26 USC 163 – Interest
4
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
5
Internal Revenue Service. Instructions for Form 1098 (12/2026)
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Internal Revenue Service. Publication 551, Basis of Assets
8
Office of the Law Revision Counsel. 26 USC 163 – Interest
9
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home
10
Internal Revenue Service. Simplified Option for Home Office Deduction
11
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
12
eCFR. 26 CFR 1.121-1 – Exclusion of Gain From Sale or Exchange of a Principal Residence
13
Internal Revenue Service. Residential Clean Energy Credit
14
Office of the Law Revision Counsel. 26 USC 25C – Energy Efficient Home Improvement Credit