Buying a house can increase your tax refund through the mortgage interest deduction, but only if you itemize deductions instead of taking the standard deduction
When you buy a house and take out a mortgage, you can deduct the interest you pay on that loan from your taxable income — but only in specific circumstances. The catch: you have to itemize your deductions on your tax return, which means listing out all your deductible expenses instead of taking the standard deduction (a flat amount the IRS lets everyone take). For most people, the standard deduction is larger, so buying a house does not automatically mean a bigger refund.
The mortgage interest deduction only helps your refund if your total itemized deductions — mortgage interest plus property taxes, charitable donations, and a few other things — add up to more than the standard deduction for your filing status. In 2024, the standard deduction is $14,600 for single filers and $29,200 for married filing jointly. If your mortgage interest and other deductions do not exceed those amounts, itemizing will not change your refund at all.
Property taxes on your new home also factor in. You can deduct up to $10,000 in state and local taxes (SALT) combined, which includes property tax. This cap applies whether you itemize or not, and it has made the mortgage interest deduction less valuable for many homebuyers since 2017.
Key Takeaways
- Mortgage interest is only deductible if you itemize deductions, and only if your total deductions exceed the standard deduction for your filing status.
- Property tax on your home is deductible up to $10,000 combined with other state and local taxes, regardless of whether you itemize.
- First-time homebuyers do not get a separate tax credit or refund boost — the deduction works through your regular tax return.
- Points paid to lower your mortgage rate may be deductible, but the rules depend on the loan type and whether you paid them upfront or rolled them into the loan.
- Selling a house you lived in can exclude up to $250,000 (or $500,000 if married) of profit from your taxable income, which affects your refund in the year of sale.
When mortgage interest actually increases your refund
Your refund grows because of mortgage interest only if itemizing deductions lowers your taxable income more than the standard deduction would. This happens most often in the first few years of a mortgage, when you pay more interest than principal, and when you have other deductible expenses — charitable donations, medical bills over 7.5% of your income, or significant unreimbursed work expenses.
To know whether itemizing helps you, add up: mortgage interest paid (your lender sends Form 1098 in January), property taxes, SALT taxes up to $10,000, charitable donations, and any other deductible expenses. If that total exceeds your standard deduction, itemize. If it does not, take the standard deduction and ignore the mortgage interest.
The IRS Form 1098 (Mortgage Interest Statement) arrives by January 31 and shows how much interest you paid in the previous year. This is the number you use on Schedule A if you itemize. Your lender sends it automatically if you paid $600 or more in mortgage interest.
Points, closing costs, and what you cannot deduct
Mortgage points (also called discount points) are fees you pay upfront to lower your interest rate. Points are deductible, but the rules are strict. If you paid points on a purchase mortgage and they were clearly identified as points on your closing disclosure, you can deduct them in the year you paid them — but only if you itemize. If you rolled the points into the loan balance instead of paying them upfront, you have to deduct them over the life of the loan, a small amount each year.
Most other closing costs are not deductible. Appraisal fees, title insurance, homeowner's insurance, property inspections, and loan origination fees do not reduce your taxable income. These costs do increase your basis in the home — the amount you paid for it — which matters later when you sell.
Homeowner's insurance premiums are never deductible on your personal tax return, even though they are a real cost of owning a home. Only mortgage interest and property tax get deduction treatment.
Capital gains when you sell the house later
Buying a house does not affect your refund in the year of purchase, but selling it does. When you sell a home you lived in for at least two of the past five years, you can exclude up to $250,000 of profit from your taxable income (or $500,000 if you are married filing jointly). This exclusion means that profit does not show up on your tax return at all, so it does not reduce your refund or create a tax bill.
Your profit is the sale price minus your basis. Basis includes what you paid for the house plus the cost of permanent improvements (a new roof, kitchen remodel, addition), minus any depreciation if you used part of the home for business. Closing costs and points you paid upfront are part of basis too.
If your profit exceeds the exclusion limit, the excess is taxed as a capital gain. This can reduce your refund or create a tax bill in the year you sell. Most homeowners stay well under the exclusion limit, so this does not affect them.
How to report the mortgage interest deduction on your tax return
If you itemize deductions, you report mortgage interest on Schedule A (Itemized Deductions), which attaches to Form 1040. You enter the amount from your Form 1098 in the line for mortgage interest. You also enter property taxes (up to $10,000 combined with other SALT) on the same form.
If you use tax software, it will ask whether you want to itemize or take the standard deduction. The software usually calculates both and recommends the larger one. If you use a tax preparer, they will ask about your mortgage and property taxes and decide which method saves you more.
Keep your Form 1098 and any documentation of property taxes paid. The IRS does not usually ask for these unless you are audited, but having them on hand protects you.
Refinancing and how it affects your deduction
When you refinance your mortgage, you get a new Form 1098 from your new lender. The interest you paid to your old lender in the months before refinancing still counts — your old lender will send you a Form 1098 for that partial year. Your new lender sends a Form 1098 for the interest you pay after refinancing closes.
If you paid points on the refinance, the deduction rules are different than for purchase points. Refinance points must be deducted over the life of the new loan, not all at once. This is because the IRS treats a refinance as a new loan, not a continuation of the original one.
Refinancing does not change your property tax deduction — that stays the same regardless of your mortgage.
Frequently Asked Questions
Do first-time homebuyers get a special tax credit or refund?
No federal tax credit exists for first-time homebuyers at the federal level. Some states offer credits or deductions, but these vary by state and are not automatic. The only tax benefit from buying a home is the mortgage interest deduction if you itemize, and the capital gains exclusion when you sell.
Will buying a house increase my refund if I take the standard deduction?
No. If you take the standard deduction, mortgage interest and property taxes do not reduce your taxable income. You get the same refund whether you own a home or rent. Itemizing is the only way the mortgage interest deduction helps you.
What if I bought the house late in the year — do I get a partial deduction?
Yes. You deduct only the mortgage interest you actually paid in that calendar year. If you closed in November and paid two months of interest, you deduct only those two months' worth. Your Form 1098 will show the exact amount.
Can I deduct property taxes if I do not itemize?
No. Property taxes are only deductible if you itemize. However, you can deduct up to $10,000 in property taxes combined with other state and local taxes (SALT) if you do itemize, regardless of your filing status.
Does buying a second home or investment property change the deduction rules?
Mortgage interest on a second home you use personally is deductible under the same rules as your primary home. Interest on a rental property or investment property is deductible, but on Schedule E (Rental Income and Loss), not Schedule A. The rules are different and more complex for investment properties.