Mortgage Interest Deduction vs Standard Deduction: Which Saves More?

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Owning a home represents a significant financial milestone for many Americans. Beyond the personal benefits, homeownership can also unlock substantial federal tax advantages, potentially lowering a taxpayer’s annual tax bill.

This guide explores the primary federal tax deductions, exclusions, and credits available to homeowners in the United States, clarifying eligibility requirements, limitations, and the impact of recent tax legislation.

Deducting Homeownership Costs: Lowering Your Taxable Income

Several expenses associated with owning a home may be deductible, reducing a taxpayer’s taxable income if they itemize deductions on Schedule A (Form 1040).

Home Mortgage Interest Deduction

One of the most significant tax benefits for homeowners is the ability to deduct the interest paid on a home mortgage. This deduction generally applies to interest paid on debt secured by a taxpayer’s main home or a second home.

To claim this deduction, a taxpayer must file Form 1040 or 1040-SR and itemize deductions on Schedule A. The mortgage must qualify as “secured debt” on a “qualified home” in which the taxpayer has an ownership interest. A qualified home includes a house, condominium, cooperative apartment, mobile home, houseboat, or similar property with sleeping, cooking, and toilet facilities. Secured debt means the taxpayer signed a mortgage or similar instrument that makes their ownership interest in the qualified home security for the debt, and it is properly recorded.

The amount of mortgage interest that can be deducted is subject to limits, which were significantly altered by the TCJA for debt incurred after December 15, 2017. This created a dual system based on when the mortgage debt was obtained:

Debt Incurred On or Before December 15, 2017

For mortgages taken out on or before this date (often referred to as “grandfathered debt” if taken out by October 13, 1987, or “home acquisition debt” if taken out after October 13, 1987, but before December 16, 2017), homeowners can generally deduct interest on up to $1 million of qualified debt ($500,000 if married filing separately). This debt must have been used to buy, build, or substantially improve the qualified home (home acquisition debt).

Debt Incurred After December 15, 2017 (Tax Years 2018-2025)

Under the rules established by the TCJA, for mortgages taken out after this date, homeowners can deduct interest on only up to $750,000 of qualified debt ($375,000 if married filing separately). This debt must also be home acquisition debt, meaning the proceeds were used to buy, build, or substantially improve the home securing the loan.

These limits apply to the combined total debt on a main home and a second home. If a homeowner refinanced grandfathered debt after December 15, 2017, the original $1 million limit generally still applies to the refinanced amount, provided the new loan balance does not exceed the balance of the old mortgage immediately before the refinancing. However, if additional cash was taken out during the refinance, the deductibility of interest on that extra amount depends on how the funds were used and the applicable debt limits.

Table 1: Home Mortgage Interest Deduction Limits (TCJA Impact: 2018-2025)

Note: MFS = Married Filing Separately; MFJ = Married Filing Jointly. Limits apply to total qualified residence loan debt.

A significant change under the TCJA affects home equity loans and home equity lines of credit (HELOCs). For tax years 2018 through 2025, interest paid on home equity debt is deductible only if the loan proceeds were used to buy, build, or substantially improve the taxpayer’s home that secures the loan. If the funds were used for other personal expenses, such as paying off credit cards or taking a vacation, the interest is not deductible during this period.

This is a temporary rule; for tax years before 2018 and potentially after 2025 (if the law reverts), interest on home equity debt up to $100,000 was generally deductible regardless of how the proceeds were used. Qualifying substantial improvements might include projects like remodeling a kitchen, adding a room, or replacing a roof. Careful record-keeping is essential to prove how home equity loan proceeds were used if claiming the interest deduction.

Mortgage interest paid is typically reported to the homeowner and the IRS by the lender on Form 1098, Mortgage Interest Statement. This amount is generally entered on Schedule A (Form 1040), line 8a. If deductible interest was paid but not reported on Form 1098 (e.g., interest paid to the seller of the home), it’s reported on line 8b.

Other potentially deductible interest-related payments include late payment charges (if not for a specific service) and mortgage prepayment penalties. Interest paid up to, but not including, the date of a home sale is also deductible.

For detailed rules on deducting home mortgage interest, consult IRS Publication 936, Home Mortgage Interest Deduction. The IRS also offers an Interactive Tax Assistant tool, “Can I Deduct My Mortgage-Related Expenses?”

State and Local Tax (SALT) Deduction

Homeowners who itemize may also deduct certain state and local taxes paid during the year. These primarily include state and local real estate (property) taxes. Taxpayers generally have the option to deduct either state and local income taxes or state and local general sales taxes, but not both, in addition to property taxes.

The most significant recent change affecting this deduction is the $10,000 SALT Cap imposed by the TCJA for tax years 2018 through 2025. This rule limits the total deduction for all state and local taxes—including property taxes combined with either income or sales taxes—to a maximum of $10,000 per household ($5,000 for married individuals filing separately).

This cap, combined with the higher standard deduction, is a major factor contributing to the sharp decline in the number of taxpayers who itemize deductions post-TCJA. The impact of the cap is felt most acutely by taxpayers in states with high property and/or income taxes (such as California, New York, New Jersey, and Illinois) and by higher-income taxpayers, whose state and local tax payments often exceeded the $10,000 threshold even before the cap.

To be deductible, state and local real property taxes must be based on the assessed value of the property and charged uniformly across all properties in the community for general governmental or community purposes. When a home is bought or sold, property taxes are typically divided between the buyer and seller based on the number of days each owned the property during the tax year, regardless of who actually paid the bill; each party can deduct their respective share. If taxes are paid through an escrow account with the mortgage lender, the homeowner can only deduct the amount the lender actually paid out to the taxing authority during the year.

Several items related to property ownership are not deductible as real estate taxes. These include:

• Charges for specific services, such as water fees, trash collection, or sewer fees
• Assessments for local benefits that tend to increase the value of the property, like new streets, sidewalks, or sewer lines (though amounts for maintenance or repair of these benefits might be deductible)
• Transfer taxes or stamp taxes paid upon the sale of a property
• Homeowners’ association (HOA) or condominium association fees or assessments
• Foreign property taxes

Deductible state and local real estate taxes are reported on Schedule A (Form 1040), line 5b. The total amount claimed on lines 5a (income or sales tax), 5b (real estate tax), and 5c (personal property tax) cannot exceed the $10,000 limit ($5,000 MFS).

Detailed information on deductible taxes can be found in IRS Publication 530, Tax Information for Homeowners and IRS Tax Topic 503, Deductible Taxes.

Mortgage Points (Prepaid Interest)

“Points” are fees paid directly to the lender at closing in exchange for a reduced interest rate on a mortgage loan; they are essentially prepaid interest. One point typically equals 1% of the loan principal. Homeowners who itemize deductions may be able to deduct points paid on their mortgage.

It’s important to distinguish deductible “discount points” from non-deductible fees sometimes also called points, such as loan origination fees, appraisal fees, notary fees, or property taxes.

Whether points can be deducted entirely in the year they are paid or must be deducted gradually over the life of the loan depends on meeting strict IRS criteria:

Deducting Points Fully in the Year Paid

This is generally allowed only if all the following conditions are met:

• The loan is secured by the taxpayer’s main home (principal residence)
• The loan was used to buy or build the main home (or sometimes to improve it, though points for improvements often must be amortized unless specific conditions related to refinancing are met)
• Paying points is an established business practice in the geographic area where the loan was made
• The points paid were not excessive compared to the amount generally charged in that area
• The points were computed as a percentage of the loan principal
• The amount is clearly designated as points on the settlement statement (like a Closing Disclosure or HUD-1)
• The taxpayer provided unborrowed funds at or before closing that were at least equal to the points charged. Funds borrowed from the lender or mortgage broker specifically to pay the points do not count. However, points paid by the seller on the buyer’s behalf are treated as paid by the buyer and can be deducted, provided the buyer reduces their cost basis in the home by the amount of the seller-paid points.

Deducting Points Over the Life of the Loan

If the conditions for deducting points in the year paid are not met, or if the points were paid for refinancing a mortgage or for a loan on a second home, the points must generally be deducted ratably (equally) over the life of the loan.

To calculate the annual deduction, the total points paid are divided by the total number of monthly payments scheduled over the loan term (e.g., 360 for a 30-year mortgage). This per-payment amount is then multiplied by the number of payments made during the tax year.

If the loan ends early (e.g., through payoff or refinancing with a different lender), any remaining undeducted points can typically be deducted in full in the year the loan terminates. However, if the loan is refinanced with the same lender, the remaining points from the original loan must generally be deducted over the term of the new loan. This distinction highlights the need for careful record-keeping regarding loan history and refinancing details.

Points reported by the lender on Form 1098 are typically included with mortgage interest on Schedule A, line 8a. Points paid but not reported on Form 1098 should be entered separately on Schedule A, line 8c.

A concise summary is available in IRS Tax Topic 504, Home mortgage points. More comprehensive details are in IRS Publication 936, Home Mortgage Interest Deduction.

Home Office Deduction

Taxpayers who use part of their home for business purposes may be able to deduct certain home expenses. This deduction is subject to strict requirements, particularly regarding how the space is used. Generally, to qualify, a specific area of the home must be used exclusively and regularly:

• As the taxpayer’s principal place of business for any trade or business; OR
• As a place to meet or deal with patients, clients, or customers in the normal course of the trade or business; OR
• In the case of a separate structure not attached to the home (like a studio or barn), in connection with the trade or business.

The “exclusive use” test means the space must be used only for business, with no personal use allowed. This is a high standard and often disqualifies areas used for mixed purposes (e.g., a spare room used as an office but also for guests). The “regular use” test means the use must be ongoing, not just occasional or incidental.

Exceptions to the exclusive use test exist for storing inventory or product samples (if the home is the sole fixed location of a retail/wholesale business) and for licensed daycare facilities operating in the home.

It is important to note that following the TCJA’s elimination of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor (through 2025), employees who work from home for an employer generally cannot claim the home office deduction. This deduction is primarily available to self-employed individuals filing Schedule C (Form 1040).

There are two methods for calculating the deduction:

Actual Expense Method

This involves determining the percentage of the home used for business (based on square footage) and deducting that percentage of allocable indirect home expenses (e.g., utilities, insurance, general repairs, depreciation, mortgage interest, property taxes) plus 100% of any direct expenses (e.g., painting only the office).

Mortgage interest and property taxes allocable to business use are deducted here instead of as itemized deductions. This method requires detailed record-keeping but may yield a larger deduction, particularly due to depreciation. It is calculated using Form 8829, Expenses for Business Use of Your Home.

Simplified Method

This option allows a deduction of $5 per square foot of home space used for business, up to a maximum of 300 square feet (resulting in a maximum deduction of $1,500 per year). This method is much simpler, requiring no tracking of actual expenses.

However, taxpayers using this method cannot deduct depreciation for the business use portion of the home, and mortgage interest and property taxes related to the home are deducted in full on Schedule A (subject to their usual limits) rather than being partially allocated to business use. The choice between methods involves a trade-off between potentially higher deductions (Actual Expenses) and simplicity (Simplified Method).

For comprehensive rules, refer to IRS Publication 587, Business Use of Your Home.

Excluding Profit from Selling Your Home: Capital Gains Exclusion

When homeowners sell their main home for more than they paid for it (plus certain improvements), they realize a capital gain. A significant tax benefit allows eligible taxpayers to exclude a large portion, or even all, of this gain from their taxable income. It’s important to note that if a main home is sold for less than its adjusted basis, the resulting loss is generally not deductible.

To qualify for the maximum exclusion, taxpayers must meet both an ownership test and a use test:

• Ownership Test: The taxpayer must have owned the home for at least two years (24 months) during the 5-year period ending on the date of the sale.
• Use Test: The taxpayer must have lived in the home as their main home (principal residence) for at least two years (24 months) during the same 5-year period.

The two years of ownership and two years of use do not need to be continuous, nor do they need to be the same two years. This flexibility means, for example, that a homeowner could live in the house for two years, rent it out for up to three years, and potentially still qualify for the full exclusion upon selling it, provided both tests are met within the five-year look-back period.

The maximum amount of gain that can be excluded is:

• $250,000 for taxpayers filing as single, married filing separately, or head of household
• $500,000 for married couples filing a joint return

To qualify for the higher $500,000 exclusion, generally: (1) at least one spouse must meet the ownership test, (2) both spouses must meet the use test, and (3) neither spouse must have excluded gain from the sale of another home within the two-year period ending on the date of the current sale.

The exclusion applies only to the sale of a taxpayer’s main home, defined as the one lived in most of the time. If a taxpayer owns more than one home, a “facts and circumstances” test (considering factors like address on tax returns, driver’s license, voter registration, time spent, and proximity to work/banks/family) determines which property qualifies as the main home.

Table 2: Home Sale Capital Gains Exclusion Quick Guide

Even if the two-year ownership and use tests are not fully met, a taxpayer might still qualify for a partial (reduced) exclusion if the primary reason for the sale is a change in place of employment, health reasons, or certain unforeseen circumstances. These exceptions acknowledge that life events often necessitate moving before the two-year mark, and the tax code provides relief to avoid penalizing homeowners in such situations. The amount of the reduced exclusion is generally prorated based on the portion of the two-year requirement that was met.

Special rules also apply for members of the military, Foreign Service, intelligence community, and Peace Corps on qualified extended duty, allowing them to suspend the 5-year test period for up to 10 years to help meet the residency requirement. Rules also exist for separated or divorced taxpayers and surviving spouses, potentially allowing them to count a spouse’s or deceased spouse’s time of ownership or use, or qualify for the $500,000 exclusion under specific conditions.

A crucial limitation exists: if depreciation deductions were claimed on the home after May 6, 1997 (for example, due to using part of the home as an office or renting it out), the portion of the gain attributable to that depreciation cannot be excluded. This “recaptured” depreciation is taxable, potentially at a rate up to 25% (unrecaptured Section 1250 gain), which can be higher than standard long-term capital gains rates. This requires careful calculation for homeowners who have previously claimed depreciation.

Reporting the home sale on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040) is generally required if: (1) the gain exceeds the maximum exclusion amount, (2) the taxpayer chooses not to exclude the gain, or (3) the taxpayer received Form 1099-S, Proceeds From Real Estate Transactions. If the entire gain is excludable and no Form 1099-S was received, reporting the sale on the tax return may not be necessary.

The definitive resource for these rules is IRS Publication 523, Selling Your Home. A summary is also available in IRS Tax Topic 701, Sale of your home.

Tax Credits for Homeowners: Dollar-for-Dollar Savings

Unlike deductions, which reduce the amount of income subject to tax, tax credits directly reduce the amount of tax owed, making them generally more valuable dollar-for-dollar. For homeowners, significant credits are available for making energy-related improvements.

Home Energy Tax Credits

The Inflation Reduction Act of 2022 significantly expanded and modified two key tax credits aimed at encouraging energy efficiency and renewable energy installations in homes. These credits generally apply to improvements made to a taxpayer’s primary residence, although some may apply to second homes used as residences; they are not available for homes not used as a residence. Renters may also be able to claim credits for certain improvements.

Energy Efficient Home Improvement Credit (EEHIC)

This credit helps offset the cost of specific energy-efficient upgrades.

Qualifying Expenses: Includes items like energy-efficient exterior doors, windows, skylights, insulation materials, central air conditioners, water heaters, furnaces, boilers, heat pumps, and biomass stoves/boilers. Home energy audits may also qualify. These components generally must meet specific energy efficiency standards (e.g., Energy Star requirements, Consortium for Energy Efficiency (CEE) highest tiers, International Energy Conservation Code (IECC) standards). Verifying that products meet these technical standards is crucial for eligibility. Starting in 2024, home energy audits must be conducted by a qualified, certified auditor.

Credit Amount & Limits (for property placed in service 2023 through 2032): The credit equals 30% of qualifying expenses. However, there are annual limits:

• A general annual limit of $1,200 applies to most energy property costs and energy-efficient home improvements combined.
• Within this $1,200 limit, there are further annual sub-limits: $250 per exterior door ($500 total for all exterior doors), $600 total for exterior windows and skylights, and $150 for home energy audits.
• A separate, higher annual limit of $2,000 applies specifically to qualified electric or natural gas heat pumps, heat pump water heaters, and biomass stoves or boilers.

Lifetime Limit: Importantly, this credit has no lifetime limit for the period 2023-2032. Taxpayers can claim the maximum annual credit each year they make eligible improvements. This annual structure encourages homeowners to undertake energy upgrades over several years.

Residential Clean Energy Credit (RCEC)

This credit incentivizes the installation of systems that generate renewable energy for the home.

Qualifying Expenses: Includes the costs of new solar electric panels, solar water heaters (certified), wind turbines, geothermal heat pumps (meeting Energy Star requirements), fuel cells, and, beginning in 2023, qualified battery storage technology with a capacity of at least 3 kilowatt-hours. Costs typically include installation and labor. Used property does not qualify.

Credit Amount & Rates: The credit rate is 30% for property placed in service from 2022 through 2032. The rate phases down to 26% for property installed in 2033 and 22% for property installed in 2034.

Limits: Generally, there is no annual or lifetime dollar limit on the RCEC. The only exception is for fuel cell property, which has specific limits based on kilowatt capacity.

Table 3: Home Energy Credits at a Glance (Property Placed in Service 2023-2032)

*RCEC rate phases down to 26% in 2033 and 22% in 2034.

These energy credits are claimed using Form 5695, Residential Energy Credits. Homeowners should retain records, including manufacturer certifications verifying that products meet the required efficiency standards, and receipts for expenses. Rebates received from manufacturers or utilities may reduce the amount of expense eligible for the credit.

For detailed information, visit the main IRS Home Energy Tax Credits page and the specific pages for the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.

Mortgage Interest Credit (Brief Mention)

Separate from the mortgage interest deduction, the Mortgage Interest Credit is available to lower-income individuals who were issued a qualified Mortgage Credit Certificate (MCC) by a state or local government agency when they obtained their mortgage for a main home. This credit is calculated based on the mortgage interest paid and the credit rate shown on the MCC. It is claimed using Form 8396, Mortgage Interest Credit.

Important Considerations & Non-Deductible Expenses

When evaluating homeowner tax benefits, several overarching points are crucial. As mentioned initially, the decision of whether to itemize deductions or take the standard deduction is paramount for benefits like the mortgage interest and SALT deductions.

For tax year 2024, the standard deduction amounts are $14,600 for single filers and those married filing separately, $29,200 for married couples filing jointly and qualifying surviving spouses, and $21,900 for heads of household. Because the TCJA nearly doubled these amounts (through 2025), far fewer taxpayers find itemizing advantageous.

A taxpayer’s total itemized deductions—which might include mortgage interest (subject to limits), SALT (capped at $10,000), deductible points, charitable contributions, and medical expenses exceeding 7.5% of adjusted gross income—must exceed their applicable standard deduction amount to gain any tax benefit from itemizing these specific homeowner expenses.

It is also essential to recognize which common homeownership costs are not generally deductible for a primary residence:

• Homeowners insurance premiums (including fire, flood, liability, and title insurance)
• Private Mortgage Insurance (PMI) premiums (the deduction for these expired after December 31, 2021)
• Homeowners’ association (HOA) or condominium association fees
• Utility costs (water, gas, electricity, internet service)
• Most home repairs and routine maintenance
• Most settlement or closing costs associated with buying the home (though some may increase the home’s cost basis, which is relevant when selling)
• Amounts paid toward the principal balance of a mortgage
• Depreciation of the home (unless allocable to deductible business use)
• Wages paid for domestic help
• Forfeited deposits or down payments

Accurate and thorough record-keeping is vital for substantiating any claimed deductions or credits. This includes retaining closing documents, Form 1098s, receipts for property taxes paid, documentation proving the use of home equity debt proceeds for qualifying improvements, receipts and certifications for energy improvements, and records supporting home office expenses or basis adjustments. Tracking the cost basis of a home, including purchase price plus the cost of significant capital improvements over the years, is also important for accurately calculating any capital gain when the home is eventually sold.

Finally, taxpayers should be aware that many of the changes introduced by the TCJA affecting individual taxpayers, including the increased standard deduction, the $10,000 SALT cap, the $750,000 mortgage debt limitation, and the rules for home equity debt interest, are currently scheduled to expire after December 31, 2025. Unless Congress acts to extend these provisions, the rules for these deductions may revert to pre-TCJA law in 2026.

Taxpayers should consult official IRS resources for the most current information. General guidance can often be found in IRS Publication 17, Your Federal Income Tax and IRS Publication 530, Tax Information for Homeowners. For the latest developments, check the relevant publication pages on IRS.gov.

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