Taxes When You Buy Your First Home

Buying your first home is a major financial milestone, and it does come with some tax benefits — though they're more modest than many first-time buyers expect, thanks to the high standard deduction that went into effect after 2017.

The two main deductions associated with homeownership are the mortgage interest deduction and the property tax deduction, both of which require you to itemize your deductions instead of taking the standard deduction ($14,600 for singles, $29,200 for married filing jointly in 2024). You can deduct interest on up to $750,000 of mortgage debt used to buy, build, or substantially improve your primary residence or a second home. Since most first-time buyers borrow well under $750,000, the full interest amount is typically deductible. Property taxes paid to state and local governments are also deductible, but the total state and local tax (SALT) deduction — including both property taxes and income or sales taxes — is capped at $10,000 ($5,000 for married filing separately).

For most first-time buyers, the combination of mortgage interest and property taxes doesn't exceed the standard deduction in the early years of homeownership, especially for smaller mortgages or in lower-tax states. This means many new homeowners don't actually get any additional tax benefit from their mortgage — they would have gotten the same deduction by just taking the standard deduction without owning a home at all. As you pay down your mortgage balance over time, the interest portion of your payment shrinks further, making itemizing even less likely to be beneficial in later years.

There are other home-related tax items worth knowing. Points paid to obtain a mortgage are generally deductible in the year paid if the loan is used to buy or improve your primary residence. If you work from home regularly and are self-employed, you may be able to claim a home office deduction for the business portion of your home expenses. And looking ahead: if you eventually sell the home after living in it as your primary residence for at least two of the five years before the sale, you may be able to exclude up to $250,000 of gain ($500,000 for married couples) from federal income tax — one of the most generous tax benefits in the entire tax code.

One thing homeownership does not provide is a tax deduction for most closing costs, your down payment, homeowners insurance premiums, or principal repayment — these are common misconceptions. The useful tax benefits are specifically the interest on your mortgage, property taxes (subject to the SALT cap), and eventually the home sale exclusion when you sell.