Pre-Tax Mortgage Payments: Interest, Points, PMI, and SALT

Owning a home opens up several mortgage tax deductions and one useful credit, but almost all of them require you to itemize on Schedule A instead of taking the standard deduction. The core benefit is the mortgage interest deduction, which applies to up to $750,000 of loan balance for mortgages taken out after December 15, 2017. Property taxes, discount points, and private mortgage insurance premiums are also deductible, and some homeowners qualify for additional breaks tied to a Mortgage Credit Certificate, a home office, or military service.

Mortgage Interest Deduction

Interest on up to $750,000 of mortgage debt used to buy, build, or substantially improve your home is deductible. Married filing separately, the cap is $375,000. These limits came from the Tax Cuts and Jobs Act in 2017 and were made permanent by the One Big Beautiful Bill Act signed in July 2025.¹

Older loans get a higher ceiling. If you took out your mortgage before December 16, 2017, up to $1 million of mortgage debt qualifies ($500,000 married filing separately). Refinancing a grandfathered loan preserves that higher limit, but only up to the remaining balance of the original loan. Any additional borrowing on top of that balance falls under the $750,000 rule.¹

Your lender sends Form 1098 each January showing the interest you paid. That figure goes on Schedule A. One catch trips people up: you have to be legally on the loan to claim the deduction. Paying a relative’s mortgage does nothing for your taxes if your name isn’t on the note.²

Which Homes Qualify

The deduction covers your primary residence and one second home. To the IRS, a “home” is any property with sleeping, cooking, and bathroom facilities. Houses, condos, mobile homes, and boats can all qualify if they meet those three requirements.¹

Renting out the second home complicates things. Interest stays deductible as a residence expense if you also use the place personally, but heavy rental use pushes the property into rental-property tax treatment, with different rules for income and expenses.³

Home Equity Loans and HELOCs

Interest on a home equity loan or HELOC is deductible only when the borrowed money is used to buy, build, or substantially improve the home securing the loan. Using a HELOC to consolidate credit card debt, pay tuition, or cover medical bills produces no deduction. The IRS looks at how you actually spent the funds, not the loan type. If you mix improvement spending with personal spending in the same line of credit, tracking becomes a headache, so keep those uses separate.⁴

Discount Points

Points paid at closing to lower your interest rate are treated as prepaid interest. On a purchase loan for your primary home, you can usually deduct the full amount the year you paid them, provided the loan is secured by that home, you brought enough of your own cash to closing to cover the points, and the points are calculated as a percentage of the loan and clearly shown on the settlement statement.¹

Seller-paid points are still deductible by the buyer, but you have to reduce your cost basis in the home by that amount. Refinance points work differently. You generally spread the deduction across the life of the new loan rather than taking it in one year. The exception: if part of the refinance went toward improving your main home, the portion of the points tied to that improvement can be deducted the same year.¹

Private Mortgage Insurance

Starting with tax year 2026, PMI premiums are once again deductible as mortgage interest on your federal return. The deduction had lapsed after 2021 and was reinstated permanently by the One Big Beautiful Bill Act. If you put less than 20% down and your lender charges PMI, those premiums now reduce your taxable income alongside your regular interest. Your lender should report PMI on the same Form 1098 you already use.

Property Taxes and the SALT Cap

Property taxes paid through your mortgage escrow are deductible as part of the state and local tax deduction. For 2026, the SALT cap is $40,000 for taxpayers with modified adjusted gross income under $500,000 ($250,000 if married filing separately). Above those income levels, the cap phases down at 30 cents per dollar over the threshold, bottoming out at $10,000. Both the cap and the income threshold rise 1% each year going forward.

SALT covers property taxes plus either state income taxes or state sales taxes, all under one combined cap. In high-tax areas, property taxes alone can consume most of the allowance. And like the interest deduction, SALT only helps if your total itemized deductions clear the standard deduction.

Mortgage Credit Certificate

A Mortgage Credit Certificate is a credit, not a deduction, which makes it more valuable dollar for dollar. State or local housing agencies issue these certificates to lower- and moderate-income first-time buyers. First-time buyer generally means you haven’t owned a principal residence in the three years before the purchase.⁵

The issuing agency sets the credit rate, which falls between 10% and 50% of your annual mortgage interest. When the rate exceeds 20%, the credit is capped at $2,000 per year. Any interest not claimed as a credit can still be deducted on Schedule A. You have to apply for the certificate through your lender during the mortgage process, not later.⁶

Selling within nine years can trigger a recapture tax, but only if all three of these are true: you sell inside the nine-year window, your income has risen significantly since purchase, and you make a profit on the sale. The maximum recapture is the lesser of 6.25% of the original loan balance or 50% of your gain. Hold the home past nine full years and recapture doesn’t apply, regardless of income or profit.⁷

Home Office Deduction for the Self-Employed

If you’re self-employed and use part of your home exclusively and regularly as your principal place of business, a portion of your mortgage interest becomes a deductible business expense. Under the regular method, you calculate the percentage of your home’s square footage used for the office and apply that percentage to your mortgage interest, property taxes, insurance, and utilities. Report it on Form 8829.⁸

The simplified method is $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500. Easier, but it can leave money on the table if your actual expenses run higher. W-2 employees cannot claim the home office deduction even when working from home full time; the Tax Cuts and Jobs Act removed that option starting in 2018, and the One Big Beautiful Bill made the change permanent.⁹

Military BAH

Active-duty military members get an unusual advantage. The Basic Allowance for Housing is excluded from gross income, doesn’t appear in Box 1 of your W-2, and isn’t subject to federal income tax, state income tax, Social Security, or Medicare. You can still deduct the mortgage interest and property taxes you pay with those BAH dollars, even though the money used to pay them was tax-free coming in.¹⁰

Civilian housing stipends work the opposite way. A cash housing allowance from a private employer is taxable compensation, reported on your W-2 and subject to normal withholding, so it doesn’t create any equivalent break.

How to Actually Claim These Deductions

Every mortgage-related write-up covered above, other than the MCC and the home office deduction, requires itemizing on Schedule A. 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. Itemizing only pays off when your total itemized deductions exceed those thresholds. Run the numbers before you commit: if your mortgage interest, property taxes, and charitable giving together fall short, the standard deduction wins.¹¹

The Mortgage Credit Certificate is claimed on Form 8396, which calculates the credit from your certificate rate and the interest you paid. That amount flows to Form 1040 and reduces your tax bill directly. Because it’s a credit, it helps whether you itemize or take the standard deduction.¹²

The home office deduction runs through Schedule C (with Form 8829 for the regular method), which is separate from the Schedule A decision. You can claim a home office and still take the standard deduction on the personal side of your return.

Recordkeeping and Audit Risk

The IRS cross-checks the interest you report on Schedule A against the Form 1098 your lender files. A mismatch is one of the faster paths to a notice. Keep Form 1098, settlement statements, and records of any points paid for at least three years after filing. Records tied to the property’s cost basis, like documentation of improvements, should be kept until at least three years after you sell.¹³

If the IRS finds you understated your tax by the greater of 10% of the correct tax or $5,000, you face a 20% accuracy-related penalty on top of the underpayment. That penalty commonly hits homeowners who deduct HELOC interest used for non-qualifying purposes, claim interest on a loan amount above the applicable cap, or deduct another person’s mortgage payments. Getting the numbers right when you file costs nothing; fixing them later costs 20%.¹⁴

1
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
2
Internal Revenue Service. Instructions for Form 1098 – Mortgage Interest Statement
3
Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses 5
4
Internal Revenue Service. Real Estate Taxes, Mortgage Interest, Points, Other Property Expenses 2
5
U.S. Department of Housing and Urban Development. HUD HOC Reference Guide – First-Time Homebuyers
6
Office of the Law Revision Counsel. 26 USC 25 – Interest on Certain Home Mortgages
7
Federal Deposit Insurance Corporation. Affordable Mortgage Lending Guide – Mortgage Tax Credit Certificate
8
Internal Revenue Service. How Small Business Owners Can Deduct Their Home Office From Their Taxes
9
Internal Revenue Service. Simplified Option for Home Office Deduction
10
Military OneSource. Military Housing Allowance and Your Taxes
11
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
12
Internal Revenue Service. About Form 8396, Mortgage Interest Credit
13
Internal Revenue Service. How Long Should I Keep Records?
14
Internal Revenue Service. Accuracy-Related Penalty