Mortgage Interest &
Property Tax Deductions 2026
Homeownership comes with significant tax benefits — but the rules changed dramatically in 2018 and most people still don't understand them. The $10,000 SALT cap, the $750,000 mortgage limit, and the higher standard deduction changed who can benefit from itemizing. Here's the real math.
The Core Question: Should You Itemize?
Since the standard deduction nearly doubled in 2018, roughly 90% of taxpayers no longer itemize. Itemizing only makes sense if your deductible expenses exceed the standard deduction: $16,100 (single), $32,200 (married filing jointly), $24,150 (head of household) in 2026.
As a homeowner, your potential itemized deductions are:
- Mortgage interest (Form 1098)
- State and local taxes (SALT), capped at $10,000
- Charitable contributions
- Medical expenses above 7.5% of AGI
For most married homeowners, unless you have significant mortgage interest AND max out SALT AND give substantially to charity, the standard deduction wins. Run both numbers before deciding. The IRS does not require you to itemize just because you own a home.
Mortgage Interest Deduction: Current Rules
The mortgage interest deduction allows you to deduct interest paid on loans used to buy, build, or substantially improve a qualified residence. A qualified residence is your main home and one other home you select (a vacation home, cabin, or second property).
The $750,000 Cap
You can deduct interest on mortgage debt up to $750,000 of acquisition debt ($375,000 if married filing separately) on your primary and one secondary residence. This cap was established by the Tax Cuts and Jobs Act of 2017 and applies to all mortgages originated after December 15, 2017.
Mortgages originated on or before December 15, 2017 retain the higher $1,000,000 grandfathered cap. This grandfathering applies even if you refinance — as long as the new loan does not exceed the original loan balance and you do not pull cash out, the old cap is preserved.
If your loan balance exceeds $750,000, only a proportional share of your interest is deductible. Formula: ($750,000 ÷ average loan balance) × total interest paid = deductible amount. Your lender reports total interest on Form 1098, Box 1, but may or may not calculate the deductible portion for you.
Homeowners in high-cost markets (NYC, SF, LA, Boston) with large mortgages and high property taxes tend to exceed the standard deduction and benefit significantly from itemizing. A $1M mortgage at 7% generates roughly $70,000 in interest in year one — well above any standard deduction, even after applying the proportional cap.
Cash-Out Refinance: The Hidden Trap
When you refinance and take cash out, only the interest on the portion of the new loan that does not exceed your original acquisition debt is deductible as home mortgage interest. The interest on the cash-out portion is only deductible if you used those funds to buy, build, or substantially improve the home securing the loan. Using cash-out funds for debt consolidation, a car, a vacation, or investing in the stock market: the interest on that portion is not deductible as home mortgage interest.
Home Equity Loans and HELOCs
Interest on home equity debt is only deductible if the funds were used to buy, build, or substantially improve the home securing the loan. Using HELOC funds for a vacation, car purchase, or debt consolidation: not deductible. Using them for a kitchen remodel or room addition: deductible. The same $750K total cap applies across all mortgage debt (first mortgage plus HELOC combined) on the qualifying property. You must be able to trace the HELOC proceeds to a qualifying use — keep detailed records of how you used the funds.
The SALT Cap: State and Local Tax Deduction
State and Local Taxes (SALT) includes state income taxes (or state sales taxes — your choice of which to deduct, but not both) plus local income taxes plus state and local property taxes. The combined deduction is capped at $10,000 per household ($5,000 if married filing separately) regardless of how much you actually paid.
The SALT cap was enacted by TCJA 2017 and was set to expire after 2025 when TCJA provisions sunset. Check the current status of the SALT cap for 2026, as Congress may have extended, modified, or allowed it to expire — the political environment around SALT deductibility has been active. Verify with IRS.gov or a tax professional before filing.
If you live in California, New York, New Jersey, Connecticut, or Massachusetts, you likely pay $15,000–$30,000 or more in state income and property taxes. You can only deduct $10,000 of it. The rest — potentially $20,000 or more — is lost with no federal tax benefit. This is the single biggest hit from the 2018 tax law for high-earners in expensive states.
State Workarounds: Pass-Through Entity Tax
Many states have enacted "Pass-Through Entity (PTE) taxes" — also called "SALT workarounds" — that allow owners of S-corporations, partnerships, and LLCs to pay state income tax at the entity level rather than the individual level. Entity-level state taxes are deductible as business expenses on federal Schedule E, bypassing the $10,000 SALT cap entirely. If you own a pass-through business and pay significant state income taxes in California, New York, New Jersey, Illinois, or similar states, consult a CPA about the PTE election — it can save thousands of dollars annually.
Property Tax Deduction: What Qualifies
State and local real property taxes on your home are deductible as part of SALT, subject to the $10,000 cap. Specifically, taxes must be ad valorem (levied at a uniform rate based on property value) and levied for the general public welfare — not for a specific improvement benefiting only your property.
What does NOT qualify as a deductible property tax:
- Special assessments for local improvements that benefit only your property — new sidewalk in front of your house, sewer connection fee, local improvement district assessment. These are added to your cost basis instead of deducted.
- Transfer taxes (deed stamps) paid when buying or selling property — not property taxes, not deductible
- Foreign property taxes — subject to special rules and generally limited since TCJA 2017
- Amounts held in escrow that have not yet been paid to the taxing authority — only deductible when actually paid to the government, not when deposited to escrow
Timing: Property taxes are deductible in the year paid. If your property taxes for a given year are paid in installments across two calendar years, each installment is deductible in the year it is paid. If you prepay 2027 property taxes in December 2026, you may deduct them in 2026.
Rental property taxes: Property taxes on rental properties are deducted on Schedule E, not Schedule A. They are not subject to the $10,000 SALT cap. This is a significant advantage of rental real estate — all property-related taxes and expenses flow through Schedule E without the SALT limitation.
Real Scenario: The Chen Family's Itemized Deductions
James and Sarah Chen file jointly with a combined AGI of $185,000. They purchased their home in 2022 with a $620,000 mortgage at a fixed rate. Here is their full picture of potential itemized deductions:
| Deduction Item | Amount | Notes |
|---|---|---|
| Mortgage interest (Form 1098, Box 1) | $18,400 | Year 4 of 30-year loan; full amount deductible ($620K under $750K cap) |
| Property taxes | $12,000 | SALT-capped at $10,000 |
| State income tax | $9,400 | Already at SALT cap with property tax — no additional deduction |
| Charitable giving (cash) | $8,000 | Fully deductible — to verified 501(c)(3) organizations |
| Medical expenses | $0 deductible | Total medical $6,000, but threshold is $185,000 × 7.5% = $13,875; below threshold |
| Total itemized deductions | $36,400 | $18,400 mortgage + $10,000 SALT + $8,000 charitable |
The standard deduction for MFJ in 2026 is $32,200. The Chens' total itemized deductions of $36,400 exceed the standard deduction by $4,200. At the 24% marginal bracket, this produces approximately $1,008 in additional tax savings compared to taking the standard deduction.
Key insight: the SALT cap is doing significant damage here. If the Chens could deduct their full $21,400 in state and local taxes, their itemized deductions would be $47,800 — saving $3,744 more in taxes. The $10,000 SALT cap costs them $2,736 per year in federal taxes they would otherwise avoid.
Points and Closing Costs
Points (also called "origination points," "loan origination fees," or "discount points") are prepaid interest — each point equals 1% of the loan amount paid upfront to obtain a lower interest rate on the mortgage. The tax treatment differs significantly based on whether the loan is a purchase or a refinance.
Points on a purchase mortgage: Fully deductible in the year paid, provided the loan meets IRS requirements: the loan is secured by your main home, paying points is an established practice in your area, the points are not paid in lieu of other fees (appraisal, inspection, title fees), and the amount of points does not exceed the local norm. Report on Schedule A, Line 8a or 8b. Form 1098, Box 6 may show points paid.
Points on a refinance: Must be amortized (deducted ratably) over the life of the loan. If you refinance a 30-year mortgage and pay $6,000 in points, you deduct $200 per year ($6,000 ÷ 30 years). If you sell the home or pay off the loan before the term ends, you may deduct all remaining undeducted points in that final year.
General closing costs: Most closing costs are NOT deductible — they include appraisal fees, home inspection fees, title insurance, attorney fees, and recording fees. These costs add to your cost basis in the property, which reduces your capital gain when you eventually sell.
Prepaid mortgage interest: If you close on a home mid-month, you typically pay interest for the remaining days of that month at closing. This prepaid interest IS deductible — it is mortgage interest, just paid in advance.
PMI (Private Mortgage Insurance) Deductibility
Private Mortgage Insurance protects the lender (not you) when you purchase a home with less than 20% down. PMI typically costs 0.5%–1.5% of the loan amount annually — on a $400,000 loan, that is $2,000–$6,000 per year that leaves your pocket with no direct benefit to you.
The PMI deduction has had a complicated history. It was first introduced in 2007, expired repeatedly, and was extended year-by-year by Congress. As of 2026, verify whether Congress has extended the PMI deduction — this should be one of the first checks a homeowner with PMI makes when preparing their return.
When the PMI deduction is in effect, it phases out for AGI above $100,000 and is completely eliminated at $109,000 (single or MFJ). PMI paid in prior years when the deduction was unavailable cannot be retroactively deducted when the provision is reinstated.
The better strategy: Rather than relying on a potentially temporary PMI deduction, work to eliminate PMI. Once you reach 20% equity (either through appreciation, additional principal payments, or time), you can request PMI cancellation from your lender. Under the Homeowners Protection Act of 1998, lenders are required to automatically cancel PMI when your loan-to-value ratio reaches 78% (based on the original appraised value). Request cancellation at 80% LTV — you may need to pay for a new appraisal to demonstrate current equity.
Refinancing: Tax Implications
Refinancing your mortgage can have several tax implications that homeowners frequently overlook. The key issues are the loan limit, the treatment of points, and the handling of any cash-out proceeds.
Rate-and-term refinance (no cash out): You replace your existing loan with a new one at a lower rate or different term. Interest on the new loan is deductible subject to the $750K cap (or $1M if the original pre-2018 loan is grandfathered and you did not increase the balance). Points paid on the refinance are amortized over the life of the new loan.
Cash-out refinance: The interest on the portion of the new loan that represents your original acquisition debt remains deductible. Interest on the cash-out portion is only deductible if the funds are used for home improvement on the securing property. Keep meticulous records — if audited, you will need to demonstrate exactly how cash-out proceeds were used.
Unamortized points from a prior refinance: If you previously refinanced and have been amortizing points, and you refinance again, you can deduct all remaining undeducted points from the prior refinance in the year of the new refinance. This is a commonly overlooked deduction.
Rental Properties: Different Rules
Rental properties operate under an entirely different tax regime than your personal residence. The rules are dramatically more favorable in many respects — and this represents some of the best real estate tax planning available in the US tax code.
Mortgage interest on rental property: Fully deductible on Schedule E as a rental expense. There is no $750,000 cap, no $1,000,000 cap — interest on any size loan used to purchase or improve a rental property is deductible against rental income.
Property taxes on rental: Fully deductible on Schedule E. Not subject to the $10,000 SALT cap at all. A rental property with $14,000 in annual property taxes can deduct all $14,000 — unlike a primary residence where that same $14,000 would be capped at $10,000.
Depreciation: Residential rental property is depreciated over 27.5 years under the Modified Accelerated Cost Recovery System (MACRS). The annual depreciation deduction is: (cost basis of the building only, not land) ÷ 27.5 = annual deduction. On a $400,000 rental property where the land value is $80,000, the depreciable basis is $320,000, and the annual depreciation deduction is $320,000 ÷ 27.5 = $11,636 per year — a deduction you receive without any cash outflow.
Passive activity rules: Rental losses are generally passive and can only offset passive income. However, if you actively participate in rental management, you may deduct up to $25,000 in rental losses against ordinary income annually (phasing out at $100,000–$150,000 AGI). Real estate professionals (more than 750 hours per year in real estate activities, more than half of all working time) can deduct unlimited rental losses against ordinary income — a powerful strategy for those who qualify.
Selling Your Home: The Capital Gains Exclusion
While not a deduction, the home sale exclusion is the biggest tax benefit of homeownership. If you have owned and used the home as your principal residence for at least 2 of the 5 years preceding the sale, you can exclude from income:
- $250,000 of capital gain — single filers
- $500,000 of capital gain — married filing jointly
You can use this exclusion once every two years. Gain above the exclusion amount is taxable at long-term capital gains rates. Keep records of your cost basis — original purchase price plus improvements made — to accurately calculate your gain at sale.
International: Canada, UK, Australia
Canada
Canada does NOT allow a mortgage interest deduction on a primary residence. However, the Smith Manoeuvre is a legal strategy to convert your mortgage interest into deductible investment loan interest. No property tax deduction for personal residences either.
UK
Mortgage interest relief for private landlords was eliminated (replaced with a 20% tax credit). Homeowners get no mortgage interest deduction on their primary home. However, the annual Capital Gains Tax exemption applies when selling.
Australia
No mortgage interest deduction on a primary residence in Australia. However, investment properties (rental properties) get full deduction on mortgage interest, which is why negative gearing is so prevalent.
Find Your Homeowner Deductions Automatically
TaxLoot scans your bank statements and flags mortgage interest payments, property tax payments, and HOA fees — totaled and ready for your tax preparer.
Find My DeductionsShould You Itemize? Quick Checklist
You should itemize if your total below exceeds your standard deduction ($16,100 single / $32,200 MFJ / $24,150 HOH):
- Mortgage interest paid (Form 1098 box 1): $______
- Mortgage points paid (if purchase loan, full amount): $______
- State income taxes + property taxes (max $10,000 combined): $______
- Charitable contributions to qualified organizations: $______
- Medical expenses above 7.5% of AGI: $______
- Total: $______
If your total exceeds the standard deduction, itemize on Schedule A. If not, take the standard deduction and stop worrying about it.