Owning a home opens up several federal tax deductions for homeowners, along with one of the biggest tax breaks in the code when you sell. The main items are mortgage interest, state and local property taxes, mortgage insurance premiums, and points paid at closing, all claimed as itemized deductions on Schedule A. On sale, you can exclude up to $250,000 of profit from tax ($500,000 if you file jointly) when the home has been your main residence long enough. The 2026 tax year brings two meaningful changes under the One Big Beautiful Bill Act: a higher cap on the state and local tax (SALT) deduction, and a permanent deduction for mortgage insurance premiums.
One threshold decides whether any of this matters for you. The standard deduction for 2026 is $32,200 for married couples filing jointly, $16,100 for single filers and for married filing separately, and $24,150 for heads of household.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If your mortgage interest, property taxes, and other itemized expenses together come in below your standard deduction, you take the standard deduction and the homeowner deductions give you nothing extra.
Mortgage Interest
You can deduct interest paid on a loan used to buy, build, or substantially improve your main home or a second home. For mortgages taken out after December 15, 2017, the deduction covers interest on the first $750,000 of debt, or $375,000 if you file married filing separately. Loans originated on or before that date keep the older $1,000,000 limit ($500,000 for married filing separately).2Office of the Law Revision Counsel. 26 USC 163 – Interest Those caps are now permanent.
Home equity loan or HELOC interest is deductible only if you used the borrowed money to buy, build, or substantially improve the home that secures the loan. Interest on home equity debt used for credit card payoff, tuition, or a vacation is not deductible.3Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
Your lender reports the interest you paid on Form 1098. If your loan balance sits above the $750,000 cap, you have to work out the deductible slice yourself rather than copying the Form 1098 total straight onto Schedule A.4Internal Revenue Service. Instructions for Form 1098
Reverse mortgages work differently. Because you don’t make monthly payments, the interest accrues but is not deductible until it’s actually paid, which usually means when the loan is settled in full. Even then the deduction can be limited, because reverse mortgage debt is generally treated as home equity debt rather than acquisition debt.5Internal Revenue Service. For Senior Taxpayers
Property Taxes and the SALT Cap
State and local real estate taxes on your home are deductible in the year you pay them, but they share a single ceiling with your state income or sales taxes under the SALT cap. Starting in 2025, the SALT cap rose from $10,000 to $40,000 for most filers, or $20,000 for married filing separately.6Internal Revenue Service. Topic No. 503, Deductible Taxes Both figures increase by 1% each year through 2029.
The higher cap phases out at higher incomes. Once your modified adjusted gross income passes $500,000 ($250,000 for married filing separately), the cap is reduced by 30% of the amount over that threshold, with a floor of $10,000 ($5,000 for married filing separately). By about $600,000 of modified AGI, the cap is fully back to $10,000.
Because the cap covers your state income or sales taxes together with your property taxes, a large state income tax bill can crowd out room for the property tax portion. In a high-tax state, you may already be at the ceiling before counting a dollar of real estate tax.
When you buy or sell during the year, the property taxes get split between buyer and seller by the number of days each owned the home. You deduct only the portion covering your ownership period, no matter who wrote the check at closing.
Watch for special assessments. A charge for a new sidewalk, sewer line, or other improvement that benefits only your neighborhood is generally not deductible as a property tax. Assessments used for community-wide maintenance or repairs can qualify.
Mortgage Insurance Premiums
The deduction for mortgage insurance premiums, which had expired and been temporarily revived several times, was made permanent by the One Big Beautiful Bill Act starting with the 2026 tax year. Private mortgage insurance (PMI), along with FHA and USDA mortgage insurance premiums, is again deductible as an itemized expense. If you put down less than 20% and carry mortgage insurance, this is a line item worth claiming.
Points Paid at Closing
Points paid when you take out a mortgage to buy or improve your main home are generally deductible in full in the year you pay them, as long as several conditions line up. Paying points has to be an established practice in your area, the amount can’t exceed what’s typical locally, and the points must be clearly shown on your closing disclosure. You also need to have brought enough cash to closing to cover the points, separate from the borrowed funds.7Internal Revenue Service. Topic No. 504, Home Mortgage Points
Refinance points work differently. You spread the deduction evenly over the life of the new loan instead of taking it all at once. Pay $3,000 in points to refinance into a 30-year loan, and you deduct $100 per year. If you later pay off that refinanced loan early, you can deduct the remaining unamortized points in the year of the payoff.
Costs You Cannot Deduct
Several everyday homeownership expenses are not deductible on your federal return: mortgage principal payments, homeowners insurance premiums, utility bills, routine repairs, and HOA or condo fees for a personal residence. Those costs also don’t add to your home’s tax basis, unless a repair rises to the level of a capital improvement that adds value, extends the home’s life, or adapts it to a new use.
Excluding the Gain When You Sell
The largest single tax break for most homeowners shows up at sale. If you sell your main home at a profit, you can exclude up to $250,000 of that gain from income, or up to $500,000 on a joint return.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence For a lot of sellers, that means no federal tax on the sale at all, and the excluded gain doesn’t even appear on the return.
The Ownership and Use Tests
To qualify for the full exclusion, two tests have to be met within the five-year window ending on the sale date. You must have owned the home for at least two years during that window, and you must have lived in it as your main home for at least two years during the same window. The two years don’t need to be consecutive, and the ownership and use periods don’t have to overlap perfectly.
For joint filers claiming the $500,000 amount, either spouse can meet the ownership test, but both have to meet the use test independently. Neither spouse can have used the exclusion on another sale in the two years before the current one.9Internal Revenue Service. Topic No. 701, Sale of Your Home
Surviving Spouses
A surviving spouse who hasn’t remarried can still claim the full $500,000 exclusion if the home is sold within two years of the spouse’s death. The deceased spouse’s time owning and living in the home counts toward the two-year requirements. After that two-year window, the surviving spouse is back to the $250,000 single-filer amount.
Partial Exclusion for Early Sales
If you sell before meeting the two-year requirement, a reduced exclusion may still apply when the sale was driven by a job change, health reasons, or other unforeseen circumstances. The partial amount equals the fraction of two years you did own and use the home, multiplied by the $250,000 or $500,000 maximum.
The IRS recognizes specific safe harbors. A qualifying job change requires the new workplace to be at least 50 miles farther from the home than the old one. A health-related sale needs a physician’s recommendation to move for diagnosis, treatment, or mitigation. Other recognized unforeseen circumstances include involuntary job loss with eligibility for unemployment benefits, divorce or legal separation, multiple births from the same pregnancy, and natural disasters or terrorism damage.
Non-Qualified Use and Depreciation Recapture
If you used the home as something other than your primary residence during part of your ownership, the portion of the gain tied to that non-qualified use period cannot be excluded. The IRS divides your total non-qualified use time by your total ownership period and applies that ratio to the gain. Time after you last lived in the home doesn’t count against you, and short absences up to two years total for job or health reasons are also excepted. Military members on qualified extended duty can exclude up to ten years of absence.
Depreciation recapture is a separate problem. If you rented the home at any point and claimed depreciation, that depreciation is taxed at a maximum rate of 25% when you sell, no matter how well you otherwise qualify for the Section 121 exclusion. The exclusion does not shelter it.
Your Home’s Tax Basis
Your adjusted basis determines how much taxable gain you actually have when you sell. A higher basis means a smaller gain, and a smaller gain is more likely to fit inside the exclusion. For long-held homes with significant appreciation, basis is often the single most important number on the return.
Purchase Price and Capital Improvements
Your starting basis is normally the purchase price plus certain settlement costs that weren’t deductible elsewhere, such as title insurance, recording fees, transfer taxes, and legal fees tied to the purchase. Costs you deducted in the year you paid them, like prorated property taxes or prepaid interest, don’t go into basis.
Capital improvements raise your basis over time. A capital improvement adds value, extends the home’s useful life, or adapts it to a new use: a new roof, a kitchen remodel, an added bedroom, central air. Routine repairs don’t count. Fixing a leaky faucet doesn’t change basis; re-piping the house does.
The payoff shows up at sale. Buy a home for $300,000, put $80,000 into qualifying improvements, and your adjusted basis is $380,000. Sell for $600,000 and your gain is $220,000, inside the $250,000 single-filer exclusion. Without the documented improvements, the gain would be $300,000 and $50,000 of it would be taxable. Keep every receipt, contract, and permit for work that qualifies.
Inherited Homes
If you inherited a home, your basis is generally the property’s fair market value on the date the previous owner died, not what they originally paid.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This stepped-up basis can wipe out most or all of the gain if you sell soon after inheriting. Inherited property is also automatically treated as long-term for capital gains purposes, no matter how quickly you sell.
Gifted Homes
A home received as a gift generally keeps the donor’s basis. This carryover rule means you take on the donor’s built-in gain.11Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If a parent paid $100,000 for a home decades ago and gifted it to you when it was worth $400,000, your basis is $100,000. Any gift tax the donor paid can push the basis up some, but not all the way to fair market value. For calculating a loss, there’s one twist: if the fair market value at the time of the gift was below the donor’s basis, your basis for a later loss is that lower fair market value.
Home Office Deduction
The home office deduction is available only to self-employed people who use part of their home exclusively and regularly for business. W-2 employees cannot claim it, even working from home full-time, and that restriction is now permanent.
To qualify, the home office has to be your principal place of business. If you work at multiple locations, it still counts as long as you handle the management and administrative side of the business there. The space has to be used only for business. A guest room that doubles as an office doesn’t qualify.
There are two ways to calculate the deduction:
- Simplified method: deduct $5 per square foot of office space, up to 300 square feet, for a maximum of $1,500. No depreciation calculation, no utility tracking.12Internal Revenue Service. Simplified Option for Home Office Deduction
- Actual expense method: figure the percentage of your home used for business and apply it to real expenses, including mortgage interest, insurance, utilities, repairs, and depreciation. Requires Form 8829 and more recordkeeping, but often produces a larger deduction.13Internal Revenue Service. Instructions for Form 8829 – Expenses for Business Use of Your Home
One trap with the actual expense method: depreciation claimed on the home office portion gets recaptured at a maximum rate of 25% when you sell. The Section 121 exclusion does not cover it. Many self-employed owners don’t think about this until the sale produces an unexpected tax bill.
Casualty Loss Deduction
Damage to your home is deductible on your federal return only when the damage occurred in a federally declared disaster area.14Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses A house fire or burst pipe outside a declared disaster zone is not deductible for personal-use property. That rule is now permanent.
For a qualifying loss, the deductible amount starts as the lesser of your adjusted basis in the property or the drop in fair market value, minus any insurance reimbursement. Two floors then shrink the number further. Each separate casualty event is reduced by $100 (or $500 for certain qualified disaster losses), and the combined total of casualty losses for the year is then reduced by 10% of your adjusted gross income.15Internal Revenue Service. Form 4684 – Casualties and Thefts Only what survives both floors is deductible. For most homeowners, the 10% AGI floor does the heavy damage. At $150,000 of AGI, the first $15,000 of net loss produces nothing.
Recordkeeping and Reporting the Sale
The burden of proof falls on you for every deduction and every basis figure.
Annual deduction records (Form 1098, property tax receipts, closing disclosures showing points paid) should be kept at least three years after you file the return claiming them.16Internal Revenue Service. How Long Should I Keep Records
Basis records are a different story. Your original settlement statement, every capital improvement receipt, and records of any casualty losses or depreciation should be kept for as long as you own the home, plus three years after you file the return for the year you sell. In practice, that means hanging onto them indefinitely until the sale is closed out. Losing proof of a $40,000 kitchen renovation from fifteen years ago means losing $40,000 of basis at sale.
The settlement agent or closing attorney files Form 1099-S with the IRS reporting the gross proceeds of the sale.17Internal Revenue Service. Instructions for Form 1099-S That form doesn’t account for your basis or the Section 121 exclusion, so the IRS sees the full sale price without context. If your gain fits inside the $250,000 or $500,000 exclusion you generally don’t need to report the sale, but you should still be ready to show you qualify if asked. If the gain goes over the exclusion, the taxable portion is reported on Form 8949 and carried to Schedule D.18Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets