Owning a home provides more than just a place to live—it can be one of the most effective ways to reduce your federal income tax bill. Two of the biggest tax breaks available to homeowners are the mortgage interest deduction and the real estate property tax deduction. When used strategically, these deductions can lower your taxable income, increase your refund, or decrease the amount you owe. This detailed guide explores how these deductions work, who qualifies, how to claim them, and how to make the most of your homeownership from a tax perspective.
Understanding Itemized vs. Standard Deduction
Before claiming mortgage interest and real estate tax deductions, you must decide whether to itemize your deductions or take the standard deduction.
For the 2025 tax year, the standard deduction is:
- $14,000 for single filers
- $28,000 for married filing jointly
- $20,800 for head of household
If your itemized deductions—including mortgage interest, property taxes, state and local taxes, medical expenses, and charitable contributions—exceed your standard deduction, itemizing may result in a lower taxable income.
Mortgage Interest Deduction Explained
The mortgage interest deduction allows you to deduct interest paid on loans used to buy, build, or improve your home. This includes first mortgages, second mortgages, and home equity loans if used for qualified purposes.
Limits on Deductible Mortgage Interest
Under the Tax Cuts and Jobs Act (TCJA), for mortgages taken out after December 15, 2017, interest is deductible on the first $750,000 of mortgage debt ($375,000 if married filing separately). For mortgages taken out before that date, the limit is $1,000,000.
Home equity loan interest is only deductible if the loan was used to buy, build, or substantially improve the home that secures the loan. Interest on loans used for personal expenses (like paying off credit cards) is not deductible.
Form 1098 – Mortgage Interest Statement
Your lender will issue Form 1098 showing the amount of mortgage interest you paid during the year. Report this amount on Schedule A (Form 1040), Line 8.
Real Estate Property Tax Deduction
Homeowners can also deduct state and local property taxes paid on real estate they own. These taxes are typically assessed annually by your local government and can be found on your mortgage escrow statement or property tax bill.
SALT Deduction Cap
The total deduction for state and local taxes (SALT)—including income taxes, sales taxes, and property taxes—is limited to $10,000 per year ($5,000 if married filing separately). This cap has significantly reduced the value of property tax deductions for homeowners in high-tax states.
Report deductible property taxes on Schedule A, Line 5b.
Combined Tax Savings Example
Let’s say you’re a single filer with the following expenses:
- Mortgage interest: $8,500
- Property taxes: $5,000
- Charitable contributions: $2,000
Your total itemized deductions = $15,500, which exceeds the $14,000 standard deduction. By itemizing, you reduce your taxable income by an additional $1,500, potentially increasing your refund or reducing the amount you owe.
Who Qualifies for These Deductions?
You must meet the following criteria:
- You must be legally liable for the mortgage and the property taxes.
- The property must be your primary or secondary residence.
- You must have documentation, including Form 1098 and tax bills or escrow statements.
- You must file Schedule A to itemize deductions.
Tips to Maximize the Deductions
- Make your January mortgage payment in December to increase interest paid in the current year.
- Prepay property taxes before year-end if you’re not subject to the AMT (Alternative Minimum Tax).
- Combine charitable donations and medical expenses in the same year to exceed the standard deduction threshold.
- Consider bunching deductions every other year to alternate between standard and itemized deductions.
Common Mistakes to Avoid
- Claiming mortgage interest on a loan that isn’t secured by your home.
- Deducting property taxes on a property you don’t legally own.
- Exceeding the $10,000 SALT cap and trying to deduct the excess.
- Forgetting to itemize when deductions clearly exceed the standard deduction.
Refinanced Mortgage Interest
If you refinanced your mortgage, the interest is still deductible, but the $750,000 limit applies based on the original mortgage’s date. Points paid to refinance must be amortized over the life of the loan unless used for home improvement.
Home Office Deduction vs. Property Tax Deduction
If you claim the home office deduction for self-employment purposes, be sure not to double-dip. Only a prorated portion of your property taxes and mortgage interest may be claimed under business expenses. The rest goes on Schedule A for personal deductions.
What if You Bought or Sold a Home This Year?
If you bought or sold your home during the tax year:
- You can deduct mortgage interest and property taxes you paid while you owned the home.
- Any prepaid interest or taxes handled at closing will be reflected on your closing disclosure or HUD-1 settlement statement.
- Real estate taxes may need to be prorated between buyer and seller.
When Itemizing Isn’t Worth It
If your itemized deductions don’t exceed the standard deduction, you won’t benefit from claiming mortgage interest or property taxes. However, keep your documents in case future years present higher deductions due to additional interest or rising taxes.
Conclusion
Mortgage interest and real estate tax deductions are two of the most powerful tools available to homeowners looking to reduce their taxable income and boost their IRS refunds. While the rules have changed over the years—especially with the introduction of the SALT cap—many taxpayers still benefit from itemizing their deductions. Take the time to calculate your potential savings, and consult a tax advisor if you’re unsure whether to itemize or take the standard deduction. A few strategic decisions could mean hundreds or even thousands more in your refund check.
