How Does Buying a House Affect Your Taxes: Mortgage, SALT, PMI

Buying a house affects your federal taxes mainly by opening up itemized deductions you couldn’t claim as a renter: mortgage interest, property taxes, and points paid at closing. Whether any of that actually lowers your tax bill depends on one number: your total itemized deductions have to exceed the standard deduction, which for 2026 is $32,200 for married couples filing jointly and $16,100 for single filers.¹ Plenty of homeowners, especially those with smaller mortgages, never clear that bar and end up taking the standard deduction anyway.

Mortgage Interest

Mortgage interest is usually the largest homeowner deduction. Your lender reports the interest you paid during the year on Form 1098, and you claim it on Schedule A. The deduction covers interest on loans used to buy, build, or substantially improve a home you own and live in, including a second home.²

There is a cap on how much mortgage debt qualifies. For loans taken out after December 15, 2017, you can deduct interest on the first $750,000 of mortgage debt ($375,000 if married filing separately). Older loans from before that date have a higher limit of $1 million ($500,000 if married filing separately).² The $750,000 cap was made permanent by the One Big Beautiful Bill Act.

Interest on a home equity loan or HELOC is deductible only if you used the borrowed money to buy, build, or substantially improve the home securing the loan. Tap a HELOC to pay off credit cards, consolidate student loans, or fund a vacation, and that interest is not deductible.² Keep records showing how you spent the funds.

Property Taxes and the SALT Cap

Property taxes are deductible as part of the state and local tax (SALT) deduction, which combines your state income taxes (or sales taxes, if you choose), local taxes, and real estate taxes into one line on Schedule A. The SALT cap sat at $10,000 for years, but the One Big Beautiful Bill Act raised it to $40,000 starting in 2025 ($20,000 if married filing separately).³ The cap adjusts slightly upward each year for inflation, so the 2026 figure may be a bit above $40,000.

Higher earners lose some of it. The $40,000 cap begins to shrink once your modified adjusted gross income exceeds $500,000 ($250,000 if married filing separately), and it can phase all the way down to a $10,000 floor ($5,000 for married filing separately).³

You can deduct property taxes paid at closing as well as amounts paid through escrow during the year, but only the portion that represents actual taxes. Fees labeled as property taxes on your settlement statement that are really service charges do not count.⁴

Will You Actually Save By Itemizing

This is where a lot of new homeowners get disappointed. You only benefit from mortgage interest and property tax deductions if your total itemized deductions exceed the standard deduction. For 2026 the standard deduction amounts are:

Married filing jointly: $32,200
Head of household: $24,150
Single: $16,100
Married filing separately: $16,100

Those figures come from the IRS’s 2026 inflation adjustments.¹

Consider a married couple with $14,000 in mortgage interest, $8,000 in property taxes, and $4,000 in state income taxes. Their itemized total is $26,000, which falls short of the $32,200 standard deduction. They would take the standard deduction, and those homeowner deductions save them nothing. To come out ahead, a joint filer needs additional deductible expenses, such as charitable contributions, to push the total above $32,200. Single filers have a much lower bar at $16,100, so they are more likely to benefit from itemizing.

Run this math every year. Mortgage interest shrinks over time as you pay down the principal, so you might itemize in the early years of the loan and switch back to the standard deduction later. The IRS Tax Withholding Estimator can help you model both scenarios.⁵

Closing Costs, Points, and PMI

Closing costs get three different tax treatments.

Points

Points, sometimes called discount points or loan origination fees, are prepaid interest that buys down your mortgage rate. If you paid points on a loan to buy your primary home, you can usually deduct the full amount in the year you paid them, as long as the charge is customary for your area, calculated as a percentage of the loan amount, and you brought enough of your own funds to closing to cover them.⁶

Points paid on a refinance work differently. You spread the deduction evenly over the life of the new loan. Pay $3,000 in points on a 30-year refinance and you deduct $100 per year for 30 years.⁶ If you refinance again or sell before the term ends, you can deduct the unamortized balance in that final year.

Costs That Add to Your Basis

Most other closing costs, including appraisal fees, title insurance, attorney fees, recording fees, and inspection fees, are not deductible in the year you pay them. They are not wasted, though. These costs get added to your home’s cost basis, which is the starting number the IRS uses to calculate your profit when you eventually sell.³ A higher basis means less taxable gain later, but only if you keep the records to prove it.

PMI

If your down payment was less than 20 percent, your lender probably requires private mortgage insurance. The deduction for PMI premiums expired and was not renewed. As of 2026, PMI premiums are not deductible.² You may still see PMI listed on your Form 1098, but ignore that line.

Home Office Deduction for the Self-Employed

If you are self-employed and work from your new home, you may qualify for the home office deduction. It is available only to people who use part of their home exclusively and regularly as their principal place of business, a place to meet clients, or as a separate structure used for business. W-2 employees cannot claim it; the deduction is for sole proprietors, freelancers, and independent contractors.⁷

“Exclusively” is the word the IRS takes most seriously. The space must be used only for work. A spare bedroom that doubles as a guest room fails the test, even if guests only stay once a year.⁷

The simplified method gives you $5 per square foot of dedicated office space, up to 300 square feet, for a maximum deduction of $1,500.⁸ The regular method lets you deduct the actual percentage of home expenses (mortgage interest, property taxes, insurance, utilities, repairs) attributable to the office space. It requires more recordkeeping but often produces a larger deduction, especially for homeowners with significant mortgage interest.

Update Your Withholding After Closing

Most new homeowners skip this step, and it costs them money all year. If your mortgage interest and property taxes push you into itemizing, your taxable income just dropped. Your employer is still withholding based on your old tax picture, so you are overpaying every paycheck and waiting until you file to get it back as a refund.

The IRS lists a home purchase as a life event that should prompt a withholding check.⁵ Use the Tax Withholding Estimator at IRS.gov with your most recent tax return, your mortgage details, and any other deductions you plan to itemize. The tool will generate a pre-filled Form W-4 you can hand to payroll.

Track Your Basis for the Eventual Sale

When you eventually sell, the profit is potentially taxable as a capital gain, but a large exclusion covers most homeowners. Single filers can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000, as long as you owned and lived in the home as your primary residence for at least two of the five years before the sale.⁹ Partial exclusions may apply if you sell earlier because of a job relocation, health condition, or certain unforeseen circumstances.

Your gain is calculated against your adjusted cost basis, not your original purchase price. Basis starts with what you paid, then rises with the closing costs mentioned earlier and with capital improvements over the years: a new roof, a kitchen remodel, an addition. Routine maintenance like repainting or fixing a faucet does not count.

The exclusion is generous enough that most homeowners never owe capital gains tax on a sale. But if you own the home for decades in an appreciating market, your gain could exceed $250,000 or $500,000, and every documented dollar of basis is a dollar of gain you do not pay tax on. Keep your Closing Disclosure, every receipt and invoice for improvements, and records of any casualty losses you claimed. The IRS says to hold these records for at least three years after filing the return for the year you sell.¹⁰ Keeping them as long as you own the property is smarter, since you will not know your final gain until you sell. Cloud-stored digital copies cost nothing and outlast fading paper.

Energy Credits Are Gone in 2026

New homeowners often hear about tax credits for solar panels, heat pumps, and energy-efficient windows. Those credits existed, but the One Big Beautiful Bill Act accelerated their termination. Neither the Energy Efficient Home Improvement Credit (heat pumps, insulation, and similar items) nor the Residential Clean Energy Credit (solar panels and geothermal systems at 30 percent of cost) is available for property placed in service after December 31, 2025.¹¹ Equipment installed before that cutoff can still be claimed on your 2025 return; upgrades made in 2026 and beyond will not qualify.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
3
Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
4
Internal Revenue Service. Topic No. 503, Deductible Taxes
5
Internal Revenue Service. Tax Withholding Estimator
6
Internal Revenue Service. Topic No. 504, Home Mortgage Points
7
Internal Revenue Service. Office in the Home – Frequently Asked Questions
8
Internal Revenue Service. Simplified Option for Home Office Deduction
9
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
10
Internal Revenue Service. Publication 523, Selling Your Home
11
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under the One Big Beautiful Bill