Buying or selling a home is one of the biggest financial decisions you can make, and it can impact your taxes in several ways. From potential deductions to unexpected tax implications, understanding how real estate transactions can affect your tax return can lead to more informed financial decisions down the line. Keep reading to learn key tax considerations when buying or selling your home.
Tax deductions when buying a home
Buying a home can be expensive, so it’s important to understand the tax deductions that may help offset some of those costs. Two of the most significant types of tax deductions available to homeowners are for mortgage interest and property taxes.
Mortgage interest tax deduction
If you’re a recent homebuyer, you may be wondering, “Is my mortgage interest tax-deductible?” The answer to that question isn’t a straightforward “yes” or “no.” Whether your mortgage interest is deductible depends on a couple of key factors, including:
Itemized deductions. If you’re going to deduct your home mortgage interest, you can’t take the standard deduction. Instead, you’ll need to itemize your deductions on Schedule A when filing your income tax return (Form 1040 or 1040-SR).
Secured debt on a qualified home. Your mortgage needs to be a secured debt on a qualified home. The loan must be tied to the property so the lender can take the home if you don’t pay. A qualified home must be a primary residence or a second home.
There are instances in which your mortgage interest can be fully deductible. These cases hinge on the loan’s date, amount, and purpose, including buying, building, or improving your home. However, it’s important to note that there can also be limits to how much interest you can deduct.
Mortgages after Dec. 15, 2017. For most mortgages after Dec. 15, 2017, you can deduct interest on up to $750,000 or less of mortgage debt ($375,000 if married filing separately).
Mortgages after Oct. 13, 1987, and before Dec. 16, 2017. Mortgages taken out before Dec. 16, 2017, may qualify for a higher limit of up to $1 million or less ($500,000 or less if you’re a married couple filing separately).
Itemizing vs. the standard deduction
To deduct mortgage interest, you must itemize your deductions instead of taking the standard deduction. If your total itemized deductions, including mortgage interest, are less than or equal to the standard deduction, taking the standard deduction would be more financially beneficial.
Property tax deduction
If you’re wondering about your mortgage interest tax, you’re probably also wondering, “Are property taxes deductible?” You may be able to deduct certain property taxes you pay during the year. The property tax deduction applies to state and local real estate taxes assessed on your home if the taxes are based on the value of the property and charged for general public purposes.
Property taxes are deductible only if you itemize deductions on your federal tax return. If you claim the standard deduction, you generally won’t receive a separate tax benefit for property taxes paid.
Property taxes fall under the state and local tax (SALT) deduction, which also includes state and local income taxes or sales taxes. The total SALT deduction has two caps for tax year 2025:
$40,000 for tax filers who are married filing jointly, single, or head of household
$20,000 for taxpayers who are married filing separately
Tax consequences of selling a home
Selling a home can have tax implications, but certain expenses and deductions may help reduce your taxable gain.
Capital gains tax on home sale
In relation to home sales, a capital gain is generally the profit made by an individual after selling their home for more than its adjusted basis. This includes the original purchase price, any improvements made, and the selling costs.
Capital gains are taxed based on how long the asset was held before it was sold, breaking it into two types:
Short-Term Capital Gains. You must own the asset for one year or less to qualify. The tax rates are the same as the ordinary income tax.
Long-Term Capital Gains. You must own the asset for over one year to qualify. This is lower than the ordinary income tax. You can pay anywhere from 0% to 20% tax depending on your income level and tax filing status.
Home sellers may not have to pay capital gains tax on some of the profit they made from the sale. If you sold your home for more than what you originally purchased it for, you won’t have to pay capital gains tax on the first $250,000 of profit ($500,000 if you are married filing jointly). Keep in mind, there are some exceptions to this exclusion. For example, in most cases, you must have owned and lived in the home as your primary residence for at least two of the last five years.
Cost basis may also play a role in reducing your gains. Specific home improvements that add value to your home can serve as an exclusion from gains if you keep a record of them.
How to calculate capital gains tax on home sale
Use our Capital Gains Tax Calculator to estimate your gains for the current tax year. All you’ll need to include is the tax year you’re estimating for, tax filing status, taxable income, state tax rate, and the details of your sale(s).
Capital Loss on home sale
Similar to a capital gain on a home sale, you can experience a capital loss. If you sell your primary residence for less than what you paid for it, the sale results in a loss, rather than a gain. A primary residence is considered personal-use property. This means the loss isn’t deductible, but you won’t owe any taxes on it either.
How is home sale taxed?
If you’re unable to exclude all the taxable gain from your sale (more than $250,000 of profit or $500,000 if you’re married filing jointly), you’ll need to report the gain on your tax return. This gain will either be taxed as short-term or long-term gain, depending on how long you owned the home before selling it.
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The bottom line
Homeownership and home sales can come with important tax considerations, from potential deductions to taxable gains. Knowing what to expect can help you avoid surprises when you file. File your tax return with TaxAct to get guided help every step of the way and file accurately and confidently this tax season.
This article is for informational purposes only and not legal or financial advice.
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