Tax Guy: Buying a home usually delivers some tax savings — but maybe not as much as you hoped

United States

If you bought a home last year or this year, good for you. Easier said than done. But new homeowners, like you, need to understand the tax angles. We are here for you. Please read on.

Home ownership write-offs

As your friendly Realtor no doubt told you, the cost of home ownership is reduced by any tax savings. But those tax savings may be less than you expect. Our beloved Internal Revenue Code allows you to write off itemized deductions for home mortgage interest and property taxes. But the Tax Cuts and Jobs Act cut back those deductions through 2025.  

Mortgage interest

If you bought a home last year or this year, you can claim an itemized deduction for the interest on up to $ 750,000 of mortgage debt that was used to acquire or improve the place, or up to $ 375,000 if you use married filing separate status. These limits apply through the end of 2025. 

Before the TCJA, the debt limits were $ 1 million and $ 500,000. Plus, under prior law, you could deduct the interest on up to $ 100,000 of home equity debt, or $ 50,000 if you used married filing separate status. Through 2025, you can only deduct interest on home equity debt that’s used to acquire or improve your residence, subject to the overall $ 750,000/$ 375,000 limit. 

As things currently stand, the more generous pre-TCJA debt limits will come back into play starting in 2026. Unless the politicians change their minds.

Property taxes   

You can claim an itemized deduction for state and local real property taxes. However, through 2025, you cannot deduct more than $ 10,000 for state and local property and state and local income taxes combined, or $ 5,000 if you use married filing separate status. 

Before the TCJA, there was no dollar limit on itemized deductions for state and local taxes. That more-favorable rule is scheduled to come back into play starting in 2026. We shall see.  

The standard deduction factor 

Because the standard deduction is a tax-law “freebie,” you don’t need any deductible expenses to claim it. The TCJA basically doubled the standard deduction amounts through 2025. For new homeowners, the relevant basic standard deduction numbers are: 

* $ 25,900 for married joint-filing couples for 2022, up from $ 25,100 for 2021;

* $ 19,400 for heads of households for 2022, up from $ 18,800 for 2021;

* $ 12,950 for singles for 2022, up from $ 12,550 for 2021.

These relatively generous standard deduction allowances are good news. But they dilute the tax-savings for new homeowners who did not previously itemize, but now do, thanks to their mortgage interest and property tax write-offs. Itemizers only come ahead to the extent their total itemized deductions for the year exceed their standard deduction allowance. Here’s an example to demonstrate the point. 

How itemizing affects your tax bill

You’re a married joint-filer and would have claimed the joint-filer standard deduction of $ 25,100 in 2021 if you had not bought a home last year. But you did buy one, so you claimed itemized deductions for $ 20,000 of mortgage interest and $ 7,000 of property taxes. You also paid $ 3,000 in state income taxes. So, on your 2021 Form 1040, your itemized deductions totalled $ 30,000 ($ 20,000 for mortgage interest + $ 10,000 for state and local property and income taxes). 

If you were in the 24% federal income tax bracket last year, you might have thought that buying the home would cut your tax bill by $ 6,480: 24% x $ 27,000 for mortgage interest and property taxes = $ 6,480. Sorry, but no.   

In fact, being able to itemize thanks to your new homeowner status only reduced your 2021 taxable income by $ 4,900. That’s the difference between the $ 30,000 of itemized write-offs you claimed and the $ 25,100 standard deduction that you could have claimed without buying. So, your actual federal income tax savings were only $ 1,176: 24% x $ 4,900 = $ 1.176. While that’s better than a kick in the butt, it’s not very meaningful in the grand scheme of things.   

The bottom line 

Now you know the unvarnished truth about the tax advantages of home ownership. Buying a home usually delivers some tax savings, but maybe not as much as you hoped for. That said, if you sell your place for a nice profit down the road, you can qualify for the valuable principal residence gain exclusion break. Under that deal, a married couple can avoid paying any federal income tax on up to $ 500,000 of home-sale profit. For an unmarried individual, the maximum federal-income-tax-free profit is $ 250,000. Not bad.