Owning a home can be one of the biggest investments of your life—and, fortunately, the U.S. tax code offers incentives for homeowners through the mortgage interest deduction and property tax deduction. These deductions can significantly reduce your taxable income, helping you save money at tax time.

In this guide, we’ll explain how the mortgage interest deduction and property tax deduction work, who qualifies, and strategies to maximize your savings.

The Mortgage Interest Deduction

The mortgage interest deduction allows homeowners to deduct interest paid on a mortgage used to buy, build, or improve a primary or secondary home. This deduction can be particularly valuable in the early years of a mortgage, when payments are interest-heavy.

Key Features of the Mortgage Interest Deduction:

• Deduction Limit: You can deduct interest on mortgage debt up to $750,000 (or $375,000 if married filing separately) for mortgages taken out after December 15, 2017. Mortgages established before that date are subject to a higher cap of $1 million.
• Eligible Properties: The deduction applies to both primary and secondary homes, as long as the property meets IRS requirements.
• Qualifying Loans: Only loans secured by the property—such as primary mortgages, second mortgages, and home equity loans—qualify. Interest on personal loans or credit cards used for home improvements isn’t deductible.

Example: If you took out a $500,000 mortgage in 2023 and paid $15,000 in mortgage interest during the year, you could deduct the full $15,000 if you itemize your deductions.

The Property Tax Deduction

The property tax deduction allows homeowners to deduct state and local property taxes they pay on their primary residence and any other real estate they own. However, this deduction is now subject to a cap.

Key Features of the Property Tax Deduction:

• SALT Cap: Under the Tax Cuts and Jobs Act (TCJA), the total deduction for state and local taxes (SALT) is capped at $10,000 ($5,000 for married filing separately). This limit includes both property taxes and state and local income taxes.
• Primary and Secondary Residences: Property taxes on your primary and secondary homes are deductible, as long as they don’t exceed the SALT cap.

Example: If you paid $7,000 in property taxes and $4,000 in state income taxes, your total SALT deduction would be limited to $10,000.

Who Qualifies for These Deductions?

To qualify for the mortgage interest and property tax deductions, you must meet several criteria:

1. Itemize Your Deductions:
• Both deductions are itemized, so you must itemize rather than take the standard deduction. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.
• If your itemized deductions—including mortgage interest, property taxes, charitable contributions, and medical expenses—don’t exceed the standard deduction, it may not be advantageous to itemize.
2. Loan Secured by the Property:
• The mortgage interest deduction applies only to loans secured by the property. Interest on unsecured loans, such as personal loans, does not qualify.
3. Ownership Requirement:
• You must be legally liable for the loan and be the owner of the property to claim these deductions. Co-signers or individuals making payments on someone else’s mortgage cannot claim the deduction.

How to Calculate the Mortgage Interest Deduction

The mortgage interest deduction applies only to the interest portion of your mortgage payment, not the principal. To claim the deduction, you’ll need to complete Schedule A of Form 1040 and attach it to your tax return.

1. Find the Total Interest Paid:
• At the end of the year, your mortgage lender will send you Form 1098, which shows the total interest you paid. Enter this amount on Schedule A under “Interest You Paid.”
2. Apply the Deduction Limit:
• If your mortgage is over the $750,000 limit, only a portion of the interest is deductible. You’ll need to calculate the allowable interest based on the proportion of your loan under the limit.
3. Include Points and Certain Fees:
• If you paid points (a percentage of the loan amount) when securing your mortgage, you might be able to deduct them, either in the year you paid them or over the life of the loan.

How to Calculate the Property Tax Deduction

To claim the property tax deduction, you’ll need records of your annual property tax payments. These payments are typically made to your local tax authority or collected through an escrow account by your mortgage lender.

1. Total Your Property Tax Payments:
• Add up the property taxes paid on each qualifying property. If taxes are included in your mortgage payment, your lender should provide an annual statement showing the total amount.
2. Apply the SALT Cap:
• Add your property tax payments to any state and local income taxes you paid. If the total exceeds $10,000, your deduction will be limited to $10,000.

Strategies to Maximize Your Mortgage Interest and Property Tax Deductions

With the SALT cap and lower mortgage interest limits, it’s important to use strategic planning to maximize your deductions. Here are some tips:

1. Pay Property Taxes Early:
• If you’re close to the $10,000 SALT cap, consider making early payments on property taxes in December to “bunch” deductions into one tax year. This is especially useful if you plan to take the standard deduction in other years.
2. Consider Refinancing:
• Refinancing can reduce your mortgage interest rate, but it can also reset the amortization schedule, making a higher proportion of each payment interest rather than principal in the early years. This could increase your deductible mortgage interest in the short term.
3. Track All Deductible Interest Payments:
• In addition to mortgage interest, don’t forget about interest on qualifying home equity loans and points paid on mortgage origination. Keeping track of these smaller deductions can help you maximize your total interest deduction.
4. Claim Property Taxes on Multiple Properties:
• If you own multiple homes, remember to include the property taxes paid on each. Just be aware of the $10,000 SALT limit, which may restrict the total amount you can deduct.

Real-Life Examples of Using These Deductions

To illustrate how these deductions work in real life, let’s consider a few scenarios:

• Example 1: First-Time Homeowners: A couple who bought their first home in 2023 with a $300,000 mortgage pays $9,000 in mortgage interest and $4,000 in property taxes. They can deduct the full $9,000 in interest and $4,000 in property taxes, for a total of $13,000. Since this exceeds the standard deduction for their filing status, they itemize to maximize their savings.
• Example 2: Homeowners with a High Mortgage: A single filer with a $900,000 mortgage taken out in 2020 pays $35,000 in mortgage interest and $7,000 in property taxes. Since the mortgage is over the limit, only a portion of the interest is deductible. The $7,000 in property taxes is also capped under the $10,000 SALT limit, so the filer deducts a total of $10,000 in SALT.
• Example 3: Second Homeowners: A taxpayer with a primary residence and a vacation home pays $5,000 in mortgage interest and $3,000 in property taxes on each home. The taxpayer can deduct all $10,000 in mortgage interest but only $7,000 in property taxes due to the SALT limit.

Making the Most of Homeownership Tax Benefits

The mortgage interest and property tax deductions can provide meaningful tax savings for homeowners. Understanding how these deductions work, who qualifies, and the impact of the SALT cap can help you make informed tax planning decisions.

With careful record-keeping and a strategic approach, you can take full advantage of the tax benefits available to homeowners. If you have a complex situation, consulting a tax professional can provide valuable guidance to maximize your deductions and ensure compliance with IRS rules.