Tax Deductions for Homeowners: What You Can and Cannot Claim

Only 11% of Taxpayers Itemize Deductions — Most Homeowners Miss Nothing

A persistent tax myth is that homeownership automatically unlocks substantial tax deductions. The reality after the Tax Cuts and Jobs Act (TCJA) of 2017 is more nuanced. The TCJA nearly doubled the standard deduction ($14,600 for single filers, $29,200 for married filing jointly in 2024) and capped the State and Local Tax (SALT) deduction at $10,000. As a result, the IRS reported that only 11.4% of taxpayers itemized deductions in 2022, down from approximately 30% before TCJA. For many homeowners — particularly those without very large mortgages in high-tax states — the standard deduction provides more tax benefit than itemizing. Understanding when itemizing actually helps is the first step toward genuine tax savings.

The Mortgage Interest Deduction: What Actually Qualifies

Under current law (as extended through 2025 under TCJA provisions), homeowners can deduct interest on mortgage debt up to $750,000 ($375,000 for married filing separately) used to buy, build, or substantially improve a primary or secondary residence. Interest on any debt above that limit is not deductible.

Mortgages originated before December 15, 2017 are grandfathered under the prior $1,000,000 limit. Points paid to obtain a mortgage are also deductible in the year paid (for purchase mortgages) or spread over the life of the loan (for refinances). Your lender issues a Form 1098 each January showing the total mortgage interest and points paid during the tax year.

Property Tax Deduction: The SALT Cap Problem

Real estate property taxes paid on your primary and secondary residences are deductible — but subject to the $10,000 SALT cap that covers all state and local taxes combined (income taxes, property taxes, sales taxes — the maximum deduction is $10,000 in total).

For homeowners in high-cost, high-tax states, this cap is particularly limiting. A California homeowner paying $12,000 in property taxes and $15,000 in state income taxes has $27,000 in potential SALT deductions — but can only claim $10,000. This capping was a significant revenue raiser within TCJA and has been the subject of ongoing Congressional debate. The current SALT cap is scheduled to expire after 2025 when TCJA provisions sunset, but legislation could extend or modify it.

Home Equity Loan Interest: Narrowly Deductible

Interest on home equity loans and HELOCs is deductible only if the borrowed funds were used to buy, build, or substantially improve the home securing the debt. Using a HELOC for home renovations qualifies; using it for a car purchase, vacation, or debt consolidation does not.

• The combined mortgage debt (primary mortgage + home equity debt) must still be within the $750,000 cap
• Keep documentation of how HELOC funds were used — the IRS requires that the deduction be supported by records
• A HELOC used for a qualified home improvement project plus a car purchase must be split: only the renovation portion's interest is deductible

The Home Sale Exclusion: The Biggest Tax Benefit

The home sale capital gains exclusion under IRC Section 121 is worth significantly more to most homeowners than years of interest deductions combined. Single taxpayers can exclude up to $250,000 of gain from the sale of a primary residence; married filing jointly taxpayers can exclude up to $500,000.

Qualifications: You must have owned the home for at least two of the last five years, and lived in it as your primary residence for at least two of the last five years. The two-year ownership and two-year use periods do not need to be the same two years. You can use this exclusion once every two years.

• A married couple who bought a home in 2015 for $400,000 and sells in 2026 for $850,000 has a $450,000 gain
• The $500,000 exclusion completely shelters this gain — no capital gains tax owed
• Track your cost basis carefully: additions and improvements add to basis and reduce taxable gain

Common Non-Deductible Expenses (The Myths)

The Home Office Deduction: Strict Rules Apply

Homeowners who run a business or who are self-employed (not W-2 employees) may deduct the home office. The space must be used exclusively and regularly for business — a guest room that doubles as an office does not qualify. The deduction covers the percentage of your home used for business applied to housing costs (mortgage interest, rent, utilities, insurance, repairs). Or use the simplified method: $5 per square foot, maximum 300 sq ft ($1,500).

W-2 employees cannot take the home office deduction, even if they work from home full-time — TCJA eliminated the miscellaneous itemized deduction for employee business expenses in 2018.

This article is for informational purposes only and does not constitute financial advice.