Can I Deduct a Down Payment on a New Home on My Taxes?
Understand the tax benefits and limitations of homeownership. Learn which home-related expenses are deductible and how to claim them.
Homeownership involves various financial considerations, including potential tax implications. Many new homeowners inquire about which expenses offer tax benefits. Understanding the tax landscape can help individuals make informed financial decisions. This article explores the deductibility of a down payment and other common home-related expenses, providing clarity for taxpayers.
Down Payments and Tax Deductions
A down payment on a new home is generally not a tax-deductible expense. The Internal Revenue Service (IRS) views this initial payment as a capital investment in an asset, not an expense incurred to generate taxable income. While a down payment reduces the mortgage loan amount, it does not directly lower your taxable income in the year it is made. Funds used for a down payment transform into equity, which can appreciate over time. Tax deductions typically apply to expenses, not to the acquisition cost of assets with a long-term useful life.
Other Deductible Home-Related Expenses
While a down payment is not deductible, several other homeownership expenses can offer tax benefits. These deductions typically require taxpayers to itemize rather than taking the standard deduction.
Mortgage interest paid on a home loan is a significant deduction for many homeowners. For mortgages taken out after December 15, 2017, taxpayers can deduct interest paid on up to $750,000 of qualified home acquisition debt. This limit applies to the combined debt on a primary residence and one second home. If the mortgage debt was incurred before December 16, 2017, a higher limit of $1 million applies.
Interest paid on home equity loans or lines of credit can also be deductible, but only if the borrowed funds are used to buy, build, or substantially improve the home that secures the loan. The interest from these loans is subject to the same debt limits as primary home acquisition debt. This means the total of all home acquisition debt, including qualifying home equity loans, cannot exceed the $750,000 or $1 million thresholds depending on the loan origination date.
State and local property taxes paid on a home are generally deductible. This deduction is part of the broader State and Local Tax (SALT) deduction. For the 2025 tax year, the total amount deductible for state and local taxes, including property, income, or sales taxes, is capped at $40,000 per household. This limit is subject to phase-downs for higher incomes.
Mortgage insurance premiums, including Private Mortgage Insurance (PMI) and Mortgage Insurance Premiums (MIP), are deductible for 2025. To qualify, the mortgage insurance must generally be on acquisition debt for a qualified residence, and certain income limitations may apply.
Points, also known as loan origination fees or discount points, represent prepaid interest paid to the lender at closing. If these points are paid for a mortgage to purchase or substantially improve a principal residence, they can generally be fully deducted in the year paid. Several conditions must be met for this immediate deduction, including that the payment of points is an established business practice in the area and the amount is not excessive. Points paid on loans for a second home, a refinanced mortgage, or home equity loans not used for home improvement generally must be deducted ratably over the loan’s life.
Standard Versus Itemized Deductions
When filing a federal income tax return, taxpayers choose between taking the standard deduction or itemizing their deductions. The standard deduction is a fixed amount that reduces taxable income, available to most taxpayers without tracking specific expenses. It varies by filing status and adjusts annually for inflation. For tax year 2025, the standard deduction is $15,750 for single filers and married individuals filing separately, $23,625 for heads of household, and $31,500 for married couples filing jointly. Taxpayers 65 or older or blind may qualify for an additional amount.
Itemized deductions allow taxpayers to subtract specific eligible expenses from their adjusted gross income. Home-related deductions, such as mortgage interest, property taxes, and qualifying points, are typically claimed as itemized deductions on Schedule A of Form 1040. Taxpayers should itemize only if their total eligible itemized deductions exceed their applicable standard deduction. For many homeowners, especially those with smaller mortgages or lower property tax burdens, the standard deduction may provide a greater tax benefit.
How to Claim Home-Related Deductions
To claim home-related deductions, taxpayers must itemize on their federal income tax return. This involves completing Schedule A (Form 1040), “Itemized Deductions,” and attaching it to their main tax form. Schedule A provides specific lines for various categories of itemized deductions, including homeownership.
Mortgage interest, including qualifying home equity loan interest, is typically reported on Form 1098, “Mortgage Interest Statement.” Lenders send this form to borrowers who paid $600 or more in interest. Taxpayers transfer the amount from Box 1 of Form 1098 to Schedule A. If points were paid at closing and are immediately deductible, they may also be reported on Form 1098.
Property taxes paid are reported on Schedule A, usually based on property tax statements. Maintaining thorough records of all home-related expenses, such as mortgage statements, property tax bills, and closing documents, is important. These documents support claimed deductions in case of an IRS inquiry. Tax preparation software or a tax professional can assist in accurately reporting these deductions on Schedule A.