What US homeowners can deduct: mortgage interest, points and SALT

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Owning a home in the United States comes with a short list of federal income tax deductions and a much longer list of costs that look deductible and are not. The difference matters at three moments: when a buyer compares loan offers and decides whether to pay points, when the closing statement arrives with its long column of charges, and when the return for the year is prepared.

This guide sets out the federal rules as the Internal Revenue Service describes them in two documents written for preparing 2025 returns: Publication 936, Home Mortgage Interest Deduction, and Publication 530, Tax Information for Homeowners. It covers which loans and homes qualify, the dollar limits on mortgage debt and the dates that decide which limit applies, the treatment of points, the deduction for real estate taxes inside the state and local tax limit, what happens in the year of a sale, and the costs that never reach the return. Everything here is federal. State income tax rules are a separate matter and are not covered. Every amount is the one printed for 2025 returns, except where a 2026 figure is given and marked as such.

IRS Publication 936 and Publication 530, 2025 editions, for 2025 returns. Limits shown are for filers other than married filing separately.

Itemising comes before everything else

Neither mortgage interest nor real estate taxes can be deducted by a taxpayer who takes the standard deduction. Both publications state the condition at the outset: the deductions are claimed on Schedule A of Form 1040, the schedule of itemised deductions, and Publication 530 adds that a taxpayer who itemises on Schedule A cannot also take the standard deduction. It is one or the other.

In practice this means the homeowner's deductions are worth something only when the itemised total is the larger of the two. Mortgage interest, points, real estate taxes and state income or sales taxes all go into that total together with the other itemised deductions a household may have. The two publications read for this guide do not print the standard deduction amounts, so the comparison itself is not worked through here; it depends on filing status and on the year.

Which home and which loan qualify

Publication 936 builds the mortgage interest deduction on two definitions: a secured debt and a qualified home.

A secured debt is one where the borrower has signed an instrument, such as a mortgage, a deed of trust or a land contract, that makes the home security for the debt, and that instrument is recorded or otherwise perfected under state or local law.

A qualified home is the taxpayer's main home or a second home. The publication's list of what counts as a home is broad: a house, a condominium, a cooperative, a mobile home, a house trailer or a boat, provided it has sleeping, cooking and toilet facilities.

The second home has its own conditions. A second home that is not rented out or held out for rent or resale at any time in the year is a qualified home, and the owner does not even need to use it. Once it is rented for part of the year, the owner must use it personally for more than 14 days or more than 10 per cent of the days it was rented at a fair rental, whichever is longer. If that test is not met, the publication treats the property as rental property, not as a second home. Only one second home can be treated as qualified in a year; the publication allows a switch during the year in specific cases, such as buying a new home, or the second home being sold or becoming the main home.

Three further rules in Publication 936 matter to buyers and builders:

• A home under construction can be treated as a qualified home for up to 24 months, provided it becomes a qualified home when it is ready for occupancy.
• A mortgage taken out within 90 days before or after the purchase can be treated as used to buy the home. This is the rule that covers a buyer who pays cash at closing and finances shortly afterwards.
• Only the part of a property used as a residence is a qualified home. When part is used for something else, cost and fair market value are divided between the two parts.

The debt limits and the dates that set them

Meeting the definitions is not enough: the amount of debt on which interest is deductible is capped, and the cap depends on when the debt was incurred. Publication 936 uses the term home acquisition debt for a mortgage taken out after 13 October 1987 to buy, build or substantially improve a qualified home and secured by that home.

Several rules sit behind those three rows.

The limits are combined, not per property. Publication 936 applies them to the total of the mortgages on a main home and a second home, so a buyer who already carries a loan on a main home has only the remainder available for a holiday home.

Grandfathered debt has no dollar limit of its own, but it is not free of consequences: it reduces the limit that applies to home acquisition debt.

A binding-contract exception protects some buyers who were mid-transaction when the lower limit arrived. According to the publication, a buyer who had a written binding contract before 15 December 2017 to close before 1 January 2018, and who bought the home before 1 April 2018, is treated as having incurred the debt before 16 December 2017, and therefore falls under the US$1 million limit.

Refinancing does not reset the clock in the borrower's favour, nor does it enlarge the qualifying amount. Refinanced home acquisition debt qualifies only up to the principal balance of the old mortgage just before the refinancing. Cash taken out above that balance is a new borrowing and is judged on what it was used for.

That leads to the rule on home equity borrowing, which the publication states as a reminder at the top: interest on a home equity loan is not deductible when the proceeds were not used to buy, build or substantially improve the home, and this holds regardless of when the debt was incurred. Reverse mortgages follow from the same idea: the publication says their accrued interest is generally treated as home equity interest and is not deductible.

When the loan is over the limit

A mortgage above the limit does not lose the whole deduction. Publication 936 provides a worksheet, Table 1, that scales the interest down in proportion. The logic can be followed in five stages.

The worksheet runs on average balances over the year, not the balance on one day. The publication describes three ways to find an average: taking the average of the first and last balances of the year, which suits a loan with no new borrowing and no large prepayments; dividing the interest paid by the interest rate; and using the averages shown on the lender's statements.

A worked example shows the effect. Assume a single mortgage taken out in 2022 to buy a main home, with an average balance of US$900,000 over the year and US$54,000 of interest paid; assume no other mortgage and a filing status other than married filing separately. The debt was incurred after 15 December 2017, so the limit is US$750,000. The limit is lower than the average balance, so the ratio is needed: US$750,000 divided by US$900,000 gives 0.833 when rounded to three decimals. The deductible interest is US$54,000 multiplied by 0.833, which is US$44,982. The remaining US$9,018 is not home mortgage interest. These are illustrative figures, chosen to show the arithmetic.

Points: one year or the life of the loan

Points are the charges a borrower pays the lender at closing, calculated on the loan amount, in return for the loan. The general rule in Publication 936 is that points are deducted ratably over the term of the loan, a little each year. Deducting them in full in the year they are paid is the exception, and it requires all nine of the following tests to be met:

1. The loan is secured by the taxpayer's main home.
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid are not more than the points generally charged in that area.
4. The taxpayer uses the cash method of accounting.
5. The points were not paid in place of amounts that are ordinarily stated separately on the settlement statement, such as appraisal, inspection, title or attorney fees and property taxes.
6. The funds the buyer provided at or before closing, plus any points the seller paid, are at least as much as the points charged, and those funds were not borrowed from the lender or mortgage broker.
7. The loan is used to buy or build the main home.
8. The points were computed as a percentage of the principal amount of the mortgage.
9. The amount is clearly shown as points on the settlement statement.

Several situations fall outside that list by definition. Points on a loan for a second home can only be deducted over the life of the loan, since the first test names the main home. Points paid to refinance are generally not deductible in full in the year paid, even on a main home, because a refinancing does not buy or build it; the publication allows the part of the points that relates to a substantial improvement to be deducted in the year paid when the first six tests are met, and it gives a home improvement loan the same treatment. Points above what is generally charged in the area are spread over the loan. If the funds the buyer brought to closing were less than the points, the deduction in the year paid stops at the amount of those funds plus any seller-paid points.

Spreading points over the loan has its own conditions in the publication: the cash method, a loan secured by a home, a term of no more than 30 years, and, for a loan of more than 10 years, terms that match other loans offered in the area. In addition either the principal is US$250,000 or less, or the points are no more than four on a loan of 15 years or less and no more than six on a longer loan.

A worked example, again with illustrative figures. Assume a 30-year loan of US$400,000 on which the buyer pays US$6,000 in points, which is 1.5 per cent of the principal. If all nine tests are met, the US$6,000 is deductible in the year of purchase. If one test fails, for instance because the property is a second home, the points are spread: US$6,000 over 30 years is US$200 a year. Assume the loan is then paid off after 10 years. By then US$2,000 has been deducted and US$4,000 has not. According to Publication 936, the remaining balance is deductible in the year the mortgage ends, with one exception: if the loan is refinanced with the same lender, the balance is spread over the new loan instead.

The publication also lists charges that are not points even when they appear near them on the paperwork: appraisal fees, notary fees, preparation costs for the note or deed, VA funding fees and mortgage insurance premiums.

The date a mortgage was taken out decides its limit, and the purpose it was used for decides whether its interest counts at all.

Real estate taxes and the SALT limit

The second large deduction is for state and local real estate taxes. Publication 530 sets two conditions on the tax itself. It must be assessed uniformly, at a like rate, on all real property in the community, and the proceeds must be used for general community or governmental purposes, not as payment for a special privilege or service granted to the owner. A tax that meets both is entered on Schedule A, line 5b, for the year it was paid, whether it was paid at closing, directly to the taxing authority or through an escrow account.

The escrow point deserves attention because it is where the monthly payment and the deduction part company. According to Publication 530, the deduction is not the total paid into the account; it is only the amount the lender actually paid out of escrow to the taxing authority during the year.

Real estate taxes then enter the overall limit on the deduction for state and local taxes, widely known as the SALT limit, which covers state and local income, sales and property taxes together. Publication 530 gives the figures for 2025 returns: the limit is US$40,000, or US$20,000 for a married person filing separately. It is reduced when modified adjusted gross income is above US$500,000, or US$250,000 for a married person filing separately, but it will not be reduced below US$10,000, or US$5,000 for a married person filing separately. The figures rise for the 2026 tax year: according to IRS Publication 505 for 2026 and the agency's correction to the 2026 Form 1040-ES, dated 16 March 2026, the limit is US$40,400, or US$20,200 for a married person filing separately, and it is reduced above US$505,000 of modified adjusted gross income, or US$252,500, with the same floors of US$10,000 and US$5,000.

Two worked examples, with illustrative figures and assuming modified adjusted gross income under US$500,000 and a filing status other than married filing separately. A household that paid US$18,000 of state income tax and US$14,000 of real estate tax has US$32,000 of state and local taxes, below the US$40,000 limit, so the whole amount is deductible if it itemises. A household that paid US$30,000 and US$16,000 has US$46,000; the deduction stops at US$40,000 and the last US$6,000 gives no federal deduction.

The year of a purchase or a sale

Real estate taxes are divided by the calendar. Publication 530 treats the seller as paying the taxes up to, but not including, the date of sale and the buyer as paying them from the date of sale, whatever the local lien dates and whoever physically paid the bill. The publication's own example is a buyer who took ownership on 1 September of a year in which the tax was US$730: the buyer owned the home for 122 days, 122 divided by 365 is 0.3342, and the buyer's deduction is US$244.

The same method at a larger scale, as a worked example with illustrative figures: assume a sale dated 1 September in a 365-day year and a tax bill of US$7,300 for that year. The buyer is treated as paying for 122 days, a share of 0.3342, or US$2,440 to the nearest dollar. The seller is treated as paying for the other 243 days, a share of 0.6658, or US$4,860. The two shares add up to the US$7,300 bill.

Delinquent taxes are the exception to that division. When a buyer agrees to pay taxes the seller owed for earlier years, Publication 530 says the amount is not deductible; it is added to the buyer's basis in the home, the figure from which a later gain or loss is measured.

Mortgage interest follows a similar cut-off for the seller: according to Publication 936, interest paid up to, but not including, the date of sale is deductible. A prepayment penalty charged when the loan is paid off at closing is deductible as mortgage interest, and so is a late-payment charge, provided the charge is not for a specific service.

Seller-paid points connect the two sides of the table. When the seller pays points on the buyer's loan, Publication 936 treats them as paid by the buyer, who may deduct them under the tests above and must reduce the basis of the home by the same amount. Publication 530 applies that basis reduction to homes bought after 3 April 1994.

Most of the other closing costs do not produce a deduction; some of them are added to basis. Publication 530 lists among the settlement costs that go into basis: abstract fees, charges for installing utility services, legal fees including the title search and the preparation of the contract and deed, recording fees, surveys, transfer or stamp taxes and owner's title insurance, together with amounts the seller owed that the buyer agreed to pay. Other charges are neither deducted nor added to basis: fire insurance premiums, rent or utility charges for occupying the home before closing, and the charges connected with getting the loan, such as loan assumption fees, the cost of a credit report and a lender-required appraisal fee.

What a homeowner cannot deduct

The costs that produce no deduction outnumber those that do.

A few entries need a sentence more. Publication 936 records that the itemised deduction for mortgage insurance premiums has expired, so the premiums a low-deposit borrower pays each month are not deductible on a 2025 return. That changes for the 2026 tax year: IRS Publication 505 for 2026 says the election to deduct qualified mortgage insurance premiums is made permanent beginning in 2026. Publication 530 also names forfeited deposits and most settlement costs among the non-deductible items.

Charges that arrive on the property tax bill are not all taxes. Publication 530 excludes itemised charges for services, such as a unit fee or a flat fee for a single service, and assessments for local benefits that tend to increase the value of the property, such as new streets or sewer lines. Those assessments are added to basis. The part of an assessment that pays for maintenance, repair or interest may be deductible, but only where the owner can show that part.

Credits that sit beside the deductions

A deduction reduces the income on which tax is calculated; a credit reduces the tax itself. Publication 530 describes one credit tied to the mortgage and two tied to energy spending.

The mortgage interest credit is for owners who were issued a qualified Mortgage Credit Certificate by a state or local government, generally for a new mortgage to buy a main home. The certificate comes before the mortgage, so it is arranged with the state or local housing finance agency in advance, the publication notes. The credit is claimed on Form 8396. Where the certificate's credit rate is above 20 per cent, the credit cannot exceed US$2,000 for the year. A credit that cannot be used because it exceeds the tax owed can be carried forward for three years; an amount lost to the US$2,000 limit cannot. Two consequences follow. The mortgage interest deduction must be reduced by the amount of the credit: an owner who paid US$12,000 of interest and claims a US$2,000 credit deducts US$10,000, in a simple illustration. And an owner who sells a home bought with a certificate within nine years may have to repay all or part of the benefit, a rule the publication calls recapture.

The energy credits belong to the past tense for new spending. According to Publication 530, the residential clean energy credit, at 30 per cent for property placed in service from 2022 to 2025, cannot be claimed for expenditures made after 31 December 2025, and the energy efficient home improvement credit cannot be claimed for property placed in service after the same date.

Forms and paperwork

The lender's annual statement is the starting point. Publication 936 says a borrower who paid US$600 or more of mortgage interest on one mortgage during the year will generally receive Form 1098, sent by 31 January of the following year. It shows the interest paid, and points on the purchase of a principal residence. Two adjustments may be needed: prepaid interest belonging to the following year is subtracted and deducted in the year it applies to, and interest refunded by the lender is shown separately.

On Schedule A the amounts are split across three lines. Line 8a takes the interest and points reported on Form 1098. Line 8b takes interest that was not reported on a Form 1098, and line 8c takes points that were not reported on one. Real estate taxes go on line 5b.

Line 8b is where seller financing appears. A buyer who pays interest to an individual who sold them the home writes that person's name, address and taxpayer identification number beside the line, and the publication requires each party to give the other their number. A penalty of US$50 may apply for each failure to do so.

What the 2025 publications leave open

Three limits of this guide should be stated plainly. The amounts above are those the IRS printed for preparing 2025 returns; for the 2026 tax year, only the state and local tax limit and the return of the mortgage insurance premium deduction were read, in IRS Publication 505 for 2026, and the other figures may differ. The rate at which the state and local tax limit is reduced above US$500,000 of modified adjusted gross income, and the years for which the US$40,000 figure applies, are not given in the passages of Publication 530 that were read. And the standard deduction, which decides whether itemising is worthwhile at all, is set out in other IRS material.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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