Buying a home is one of the biggest financial moves you’ll ever make. While most people focus on price, interest rates, and location, the tax implications of a home purchase can have a dramatic—and often underestimated—impact on your long-term finances. Thanks to the One Big Beautiful Bill Act (OBBBA), passed in July 2025, several key tax rules affecting homeowners have changed or been permanently extended, creating new opportunities and potential pitfalls for buyers.
This guide walks through the most critical tax factors to consider when acquiring a residence, including mortgage interest deductions, property tax limits, home-office rules, energy credits, sale exclusions, and more. Think of it as your roadmap for making a tax‑smart home purchase.
Mortgage Interest Deduction: The Backbone of Homeowner Tax Breaks
For most homeowners, the mortgage interest deduction is their largest tax break. The OBBBA permanently locked in the rules introduced by the Tax Cuts and Jobs Act (TCJA), so it’s important to understand exactly where the limits stand.
| Filing Status | Acquisition Debt Limit |
| All filers | $750,000 |
| Married filing separately | $375,000 |
Key Points:
- The standard deduction for tax year 2025 is
30,000 for married couples filing jointly, which provides a baseline benefit even if you don’t itemize.
- The deduction applies only to acquisition debt—money borrowed to buy, build, or substantially improve your principal residence.
- Interest on home equity loans is not deductible unless the proceeds are used for capital improvements (repairs and maintenance don’t count).
- Mortgages taken out before December 16, 2017, are grandfathered under the old $1 million limit.
- You must itemize on Schedule A to claim this deduction—if your total itemized deductions are less than the standard deduction, itemizing won’t help.
Private Mortgage Insurance (PMI) Deduction: Back for 2026
Starting in the 2026 tax year, private mortgage insurance (PMI) premiums will again be deductible as qualified residence interest, provided you itemize deductions. This is especially good news for first‑time buyers and anyone who puts down less than 20 percent.
A note on timing: The deduction for PMI has generally been made available on a year‑by‑year basis through legislation; for 2025 tax returns (filed in 2026), the deduction is not available. But for tax year 2026 and beyond, the OBBBA effectively reinstates it pending final guidance.
State and Local Tax (SALT) Deduction: The Cap Has Quadrupled
Before 2025, the deduction for state and local taxes (including property taxes) was capped at just $10,000—a major pain point for residents of high‑tax states. The OBBBA changes that drastically.
| Tax Year | SALT Deduction Cap |
| 2025 | $40,000 |
| 2026 | $40,400 |
| 2027 | $40,804 |
| 2028 | $41,212 |
| 2029 | $41,624 |
| 2030+ | $10,000 |
The higher caps apply from 2025 through 2029 and include annual 1% inflation adjustments. For 2026, the cap rises to 41,624, before dropping back to $10,000 in 2030.
However, there’s a phase‑out for high earners. The cap is reduced by **30 percent of the amount by which your modified AGI exceeds 250,000 if married filing separately), though the cap won’t drop below
5,000 for separate filers).
This change makes a huge difference for homeowners in states like California, New York, New Jersey, and Illinois. With a $40,000+ SALT cap, far more taxpayers will find it worthwhile to itemize deductions rather than take the standard deduction.
Mortgage Points: Immediate Deduction in Many Cases
When you take out a mortgage, you may pay “points” to lower your interest rate. Because points represent prepaid interest, they are generally deductible.
- For a mortgage used to buy, build, or substantially improve your principal residence, you can deduct the full amount of the points in the year you pay them—as long as certain conditions are met, such as the points being a standard practice in your area and not exceeding typical rates.
- You must have paid the points with your own funds (not borrowed from the lender), or if the seller paid them on your behalf, you reduce your home’s cost basis by the seller-paid points.
- Points paid on a refinance are not immediately deductible; they must be amortized ratably over the life of the new loan, unless a portion of the refinance proceeds are used for home improvements.
- Appraisal fees, title fees, attorney fees, and notary fees are not deductible as interest.
Deductible vs. Non‑Deductible Closing Costs
Many closing costs add to your cost basis (the total amount you’ve invested in the property) rather than being immediately deductible. Increasing your basis can reduce your capital gain when you eventually sell the home.
| Deductible | Add to Basis |
| Mortgage interest paid at closing | Abstract fees |
| Real estate taxes paid at closing | Recording fees |
| Qualified mortgage points | Title insurance |
| Legal fees | |
| Surveys | |
| Transfer taxes | |
| Any seller‑owed amounts you agree to pay |
Most settlement fees and closing costs for buying a property become additions to your basis and part of your depreciation deduction if the property is also used for business. The IRS explicitly states that “most settlement or closing costs” and “forfeited deposits, down payments or earnest money” are not deductible.
Home Office Deduction: Great for the Self‑Employed
If you’re self‑employed and use a portion of your home regularly and exclusively for your business, you may qualify for the home office deduction. The IRS requires:
- Exclusive use on a regular basis as your principal place of business, a place to meet clients, or the location of a separate structure used in connection with your business.
- The home office must be your principal place of business; for example, administrative or management tasks performed at home can qualify, even if you also work elsewhere.
Taxpayers can choose between the simplified method ($5 per square foot for up to 300 square feet) or the regular method (allocating actual expenses such as mortgage interest, utilities, insurance, and depreciation using IRS Form 8829).
🧠 Important nuance
If you claim home‑office depreciation using the regular method, that depreciation can’t be excluded from gain when you later sell your home under the Section 121 exclusion. You’ll have to recapture that depreciation as taxable gain. The simplified method, however, sets depreciation to zero—avoiding recapture entirely.
Energy‑Related Tax Credits: A Narrow Window—But Still Valuable
Energy efficiency improvements can yield tax credits, though the timeline is tight.
- Residential Clean Energy Credit (30% credit with no annual maximum) applies to solar, wind, geothermal, fuel cells, and battery storage placed in service through December 31, 2025. The 30% rate is available for 2022 through 2025.
- Energy Efficient Home Improvement Credit (30% credit, non‑refundable) applies to exterior doors/windows, insulation, heat pumps, central AC, biomass stoves, and home energy audits for property placed in service through December 31, 2025. This credit has a **combined annual limitation of
2,000 for heat pumps and biomass stoves, and $1,200 for all other qualifying improvements.
- These credits terminate for expenditures made after December 31, 2025, meaning the window to capture them is very narrow.
Given the 2025 expiration deadlines, any energy improvements should be completed and placed in service by the end of the current calendar year.
Basis and Adjustments: The Hidden Number That Affects Future Tax
Your home’s adjusted basis is essentially the total amount you’ve invested in it—your purchase price, plus certain closing costs, plus the cost of any capital improvements (adding a room, finishing a basement, replacing a roof, installing central air, etc.). Repairs and routine maintenance do not increase basis.
Why does this matter? When you eventually sell your home, your gain is generally the sale price minus your adjusted basis. A higher basis means a lower taxable gain—or a larger tax‑free gain under the Section 121 exclusion.
Seller‑paid points reduce your basis, but all other acquisition‑related costs (like legal fees, title insurance, and recording fees) increase it.
💡 Pro Tip: Keep meticulous records of every capital improvement you make, including receipts, contracts, and before/after photos. Years from now, those records could save you tens of thousands of dollars in capital gains tax.
Section 121 Exclusion: Up to $500,000 in Tax‑Free Gain
One of the most powerful tax benefits available to homeowners is the Section 121 exclusion:
- Single filers can exclude up to $250,000 of gain on the sale of their principal residence.
- Married couples filing jointly can exclude up to $500,000 of gain.
To qualify, you must have owned and used the home as your main residence for at least two of the five years immediately preceding the sale (2 years of ownership + 2 years of use). The two periods do not have to be continuous, and the exclusion can generally be used once every two years.
Important nuance: If you claimed depreciation deductions for a home office or rental activity, the amount of depreciation allowed or allowable is not eligible for the exclusion. That portion of the gain must be reported and taxed as unrecaptured Section 1250 gain.
Future Tax Planning After Your Purchase
1. Re‑visit itemization each year
With the SALT cap now at $40,000+, mortgage interest deductible, and PMI returning in 2026, far more homeowners will benefit from itemizing deductions. In past years, only about 10–15 percent of taxpayers itemized, but those numbers are likely to rise significantly, especially in high‑tax states.
2. Keep an eye on interest rates
If you refinance, check whether your new loan qualifies as acquisition debt. Only interest attributable to the amount used to buy, build, or improve your home remains deductible; cash‑out amounts used for personal expenses are not.
3. Plan for the SALT sunset
The generous 10,000.
4. Monitor energy credit expiration
With both major energy credits expiring December 31, 2025, if you’re planning solar panels, a heat pump, or other qualifying improvements, act soon. For 2026 and beyond, those credits will no longer be available.
5. Revisit your estate plan
The OBBBA permanently set the estate and gift tax exemption at 5 million in 2026. The permanent higher limit dramatically reduces the likelihood of federal estate tax for all but the very wealthiest homeowners.
Final Thoughts
Acquiring a residence is about more than finding the right neighborhood or the lowest mortgage rate. The tax treatment of your purchase affects your annual tax liability, your ability to make energy‑efficient upgrades, the size of your future tax‑free gain when you sell, and even your estate planning.
Whether you’re a first‑time homebuyer, a move‑up buyer, someone purchasing a second home, or a real estate investor, understanding these tax factors can help you:
- Keep more cash in your pocket through deductions and credits.
- Avoid costly mistakes, such as unknowingly losing part of your Section 121 exclusion.
- Make smarter improvement decisions by knowing what adds to basis.
- Plan ahead for refinancing or selling, saving tens of thousands in taxes.
Because tax laws change regularly—and because individual circumstances vary so widely—it’s essential to consult a qualified professional who understands both current law and your specific situation.
⚠️ DISCLAIMER: Tax laws, regulations, and interpretations change frequently. The information contained in this article is based on the law in effect as of the date of publication, but may not reflect subsequent legislative changes, administrative guidance, or judicial rulings. Individual tax situations vary, and this content is not intended as legal or tax advice. You should consult with a qualified tax professional to understand how the rules apply to your specific circumstances. For personalized guidance or to discuss your home purchase in more detail, please contact Alan Goldstein with any questions.
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