Buying your first home changes your tax situation in meaningful ways. Several deductions and credits are available to homeowners that renters cannot access. Understanding them before filing your taxes can reduce your bill or increase your refund.
Before you get to tax benefits, you need the right mortgage: Compare mortgage rates on LendingTree to start on the right foot.
Important Note on Tax Law
Tax rules change. The information in this guide reflects federal tax law as of the 2025 tax year. State tax rules vary significantly. Always verify current rules with IRS.gov or a qualified tax professional before filing. Nothing here constitutes tax advice.
Mortgage Interest Deduction
The mortgage interest deduction is the most significant ongoing tax benefit for homeowners. You can deduct the interest you pay on your mortgage each year if you itemize deductions.
How It Works
- Deductible on mortgage debt up to $750,000 (for loans originated after December 15, 2017)
- The $750,000 limit applies to the total mortgage debt on your primary and secondary residence combined
- Older loans (originated before December 16, 2017) have a higher $1 million limit
- Your lender sends Form 1098 in January showing the mortgage interest paid during the year
When It Makes Sense to Itemize
The standard deduction for 2025 is $15,000 for single filers and $30,000 for married filing jointly. You only benefit from the mortgage interest deduction if your total itemized deductions exceed the standard deduction for your filing status. Early in your mortgage when the interest portion is highest, itemizing is more likely to help.
Example
On a $300,000 mortgage at 7%, you pay roughly $20,900 in interest in the first year. If you are married filing jointly with no other itemized deductions, the standard deduction ($30,000) still exceeds your mortgage interest alone, so itemizing would not help — unless you add property taxes and other deductions to reach the threshold.
Property Tax Deduction
You can deduct state and local property taxes (as well as state and local income taxes or sales taxes) up to a combined limit of $10,000 per year ($5,000 if married filing separately). This is the SALT deduction cap established by the 2017 Tax Cuts and Jobs Act.
Property taxes vary widely by location. In high-tax states like New Jersey (average effective rate ~2.1%) or Illinois (~2.0%), property taxes on a $300,000 home run $6,000–$6,300 per year. In low-tax states like Hawaii (~0.3%), you might pay under $1,000.
Deducting Mortgage Points
If you paid discount points to lower your interest rate when you took out your mortgage, those points are generally fully deductible in the year you paid them — if the loan was used to buy your primary residence. This is a unique advantage: unlike refinance points (which must be deducted over the loan term), purchase points are deductible upfront.
Requirements:
- Points must be clearly listed on your Closing Disclosure
- Paid directly by you (not rolled into the loan)
- The loan must be for your primary residence
- The amount must be in the normal range for your area
Mortgage Insurance Premium Deduction
The deduction for private mortgage insurance (PMI) and FHA mortgage insurance premiums has expired and been extended multiple times. As of the time of writing, confirm its current status at IRS.gov — it is not a reliable planning tool due to its history of annual expiration and retroactive renewal.
Energy Efficiency Credits
The Inflation Reduction Act extended and expanded residential energy credits available to homeowners:
Energy Efficient Home Improvement Credit (25C)
Up to 30% of the cost of qualifying energy-efficient upgrades, capped at $3,200 per year. Eligible improvements include:
- Heat pumps and heat pump water heaters ($2,000 sub-limit)
- Insulation, windows, and doors ($600/$1,200 sub-limit)
- Electrical panel upgrades (when tied to qualifying improvements)
- Home energy audits ($150 cap)
Residential Clean Energy Credit (25D)
30% of the cost of solar panels, solar water heaters, battery storage, small wind turbines, and geothermal heat pumps installed through 2032. This credit has no dollar cap and carries forward to future years if it exceeds your tax liability.
Home Office Deduction
If you are self-employed and use part of your home exclusively and regularly for business, you may be able to deduct a portion of your housing costs as a home office. W-2 employees cannot claim the home office deduction under current law.
Two methods are available:
- Simplified method: $5 per square foot, up to 300 square feet ($1,500 max)
- Regular method: Calculate the percentage of your home used for business and apply that to actual home expenses (mortgage interest, property taxes, utilities, repairs)
Capital Gains Exclusion When You Sell
This is not relevant at purchase but matters when you eventually sell. If you have lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 of capital gains from taxes ($500,000 if married filing jointly). This exclusion can be used once every two years.
First-Time Home Buyer State Tax Credits
Many states offer their own first-time buyer programs, including mortgage credit certificates (MCCs). An MCC converts a portion of your mortgage interest into a federal tax credit rather than just a deduction — a credit is more valuable because it reduces your tax bill dollar-for-dollar rather than reducing taxable income. MCC programs are administered through state housing finance agencies. Check your state’s HFA website or ask your lender.
IRA Withdrawals for First-Time Home Purchase
First-time buyers can withdraw up to $10,000 from a traditional IRA without paying the normal 10% early withdrawal penalty (though ordinary income tax still applies). For a Roth IRA, contributions can always be withdrawn penalty- and tax-free, and up to $10,000 in earnings can also be withdrawn penalty-free for a first-time home purchase if the account has been open at least 5 years.
The IRS definition of “first-time buyer” here is lenient: you qualify if you have not owned a principal residence in the past two years.
What Homeowners Cannot Deduct
- Down payment or principal payments on your mortgage (only interest is deductible)
- Home insurance premiums (not a federal deduction for primary residences)
- Home repairs and maintenance (unless home office applies)
- Homeowners association fees
- Utilities
- Mortgage life or disability insurance
Get the Right Mortgage to Maximize Tax Benefits
| Lender | Est. Rate Range | Min Credit Score | Min Down Payment | Best For |
|---|---|---|---|---|
| LendingTree | Varies by lender | 580 (FHA) / 620 (conv.) | 3.5% (FHA) / 3% (conv.) | Comparing multiple offers at once |
| Rocket Mortgage | Competitive market rates | 580 (FHA) / 620 (conv.) | 3.5% (FHA) / 1% (ONE+ program) | Fast digital approval process |
| Better.com | Competitive market rates | 620 | 3% | Low-fee online experience |
| New American Funding | Competitive market rates | 500 (FHA) / 620 (conv.) | 3.5% (FHA) / 3% (conv.) | Buyers with lower credit scores |
A higher loan amount means more mortgage interest paid — and potentially more to deduct if you itemize. But the best mortgage is the one with the lowest total cost, not the highest interest. Compare rates and fees on LendingTree to find the right balance.
Bottom Line
The biggest ongoing tax benefit of homeownership is the mortgage interest deduction, though it only helps if your total itemized deductions exceed the standard deduction. Property taxes, points, and energy-efficiency credits add further value. Keep your Form 1098 from your lender, your property tax statements, and receipts for any qualifying home improvements. Consult a tax professional in your first year of homeownership to make sure you capture every available deduction.
Start with the right mortgage: compare rates on LendingTree before you close.