If you bought a house last year or this year, good for you. Easier said than done. But new owners like you need to understand the tax angles. We are here for you. Please read on.
Depreciation for home ownership
As your friendly real estate agent has no doubt told you, the cost of home ownership is reduced by any tax savings. But these tax savings may be less than you expected. Our beloved tax code allows you to override itemized deductions for mortgage interest and property taxes. But the Tax Cuts and Jobs Act reduced these deductions until 2025.
If you bought a home last year or this year, you can claim an itemized deduction for interest on up to $750,000 of mortgage debt that was used to acquire or improve the place, or up to $375 $000 if using a separate filing married status. These limits apply until the end of 2025.
Prior to the TCJA, debt limits were $1 million and $500,000. Additionally, under the previous law, you could deduct interest on up to $100,000 of home equity debt, or $50,000 if you used married filing separate status. Until 2025, you can only deduct interest on the equity in your property that is used to acquire or improve your residence, subject to the overall limit of $750,000/$375,000.
As it stands, the more generous pre-TCJA debt limits will come back into play starting in 2026. Unless politicians change their minds.
You can claim an itemized deduction for state and local property taxes. However, through 2025, you cannot deduct more than $10,000 for state and local property taxes and state and local income taxes combined, or $5,000 if you use a separate married filing status.
Prior to the TCJA, there was no dollar limit on itemized deductions for state and local taxes. This more favorable rule should come back into play from 2026. We will see.
The standard deduction factor
Since the standard deduction is a “free” under tax law, you don’t need any deductible expenses to claim it. The TCJA has nearly doubled standard deduction amounts through 2025. For new homeowners, the relevant base standard deduction numbers are:
* $25,900 for married couples filing jointly for 2022, compared to $25,100 for 2021;
* $19,400 for heads of families in 2022, compared to $18,800 in 2021;
* $12,950 for singles for 2022, down from $12,550 for 2021.
These relatively generous standard deductions are good news. But they’re diluting the tax savings for new homeowners who didn’t itemize before, but do now, through their mortgage interest and property tax deductions. Counts only come forward to the extent that their total itemized deductions for the year exceed their standard deduction. Here is an example to demonstrate the point.
How Venting Affects Your Tax Bill
You are a married co-filer and would have claimed the standard co-filer deduction of $25,100 in 2021 if you had not purchased a home last year. But you bought one, so you claimed itemized deductions for $20,000 in mortgage interest and $7,000 in property taxes. You also paid $3,000 in state income taxes. So on your 2021 Form 1040, your itemized deductions were $30,000 ($20,000 for mortgage interest + $10,000 for local and state property and income taxes).
If you were in the 24% federal tax bracket last year, you might have thought buying the house would lower your tax bill by $6,480: 24% x $27,000 for mortgage interest and property taxes = $6,480. Sorry but no.
Indeed, being able to itemize through your new owner status only reduced your 2021 taxable income by $4,900. It’s the difference between the $30,000 in itemized write-offs you claimed and the standard $25,100 deduction you could have claimed without buying. So your actual federal income tax savings were only $1,176: 24% x $4,900 = $1.176. While it’s better than a kick in the ass, it’s not very meaningful in the grand scheme of things.
The bottom line
Now you know the hard truth about the tax benefits of home ownership. Buying a home usually offers tax savings, but maybe not as much as you’d hoped. That said, if you sell your home for a good profit down the road, you can qualify for the valuable principal residence gain exclusion reduction. Under this agreement, a married couple can avoid paying any federal income tax for up to $500,000 of profits on the sale of a home. For an unmarried person, the maximum benefit free of federal income tax is $250,000. Not bad.