Buy a House for the Mortgage Tax Deduction? Not so Fast

This mortgage tax deduction overview has been updated with information for the 2023 and 2024 tax years. At some point every single one of us has heard the advice, “Buy a home, so you can get the tax deduction”. The popularity of this advice ranks right up there with the “A home is a great investment” meme. In fact, many people argue that a home is a good investment, in part, because of the mortgage tax deduction possibilities.

But, as we have discovered, your home is not an investment (at least not always a good one).

Will the mortgage tax deduction advice hold up under closer inspection? Before I give you some examples, I want to first clarify the basics on the mortgage tax deduction is and when you could claim it.

mortgage tax deduction

What is a Mortgage Tax Deduction?

When you get a mortgage, you are often paying insane amounts of interest in that mortgage. Banks front load the mortgage with higher interest amounts in the beginning of the mortgage which taper off over the years. They do this so they can get more money out of each mortgage in the event the debtor were to pay off the loan early.

On the mortgages I’ve held, almost two-thirds of the total payment in the first 5 or more years of the loan were interest payments. The other third goes to paying down the principal (what you actually owe) on the house. It’s highway robbery (but that’s a different story for a different day). If you ever want to self induce vomiting, look at a mortgage amortization schedule, which will show you how much of your monthly payment is interest vs principal for each month of the loan.

You must also understand the difference between a tax credit and a tax deduction. A credit is getting the full dollar amount of taxes owed returned to you. A deduction is subtraction from your taxable income (what you actually end up being taxed on based on your tax bracket). Mortgage interest is tax deductible, not a tax credit.

A mortgage tax deduction is the amount of interest you pay on your mortgage, which you then can deduct from your taxable income total. Note that post tax reform in 2018, there were limits placed on how much mortgage interest you can deduct. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017. Additionally, you can no longer deduct mortgage insurance premiums.

The Standard Deduction

It’s absolutely essential to note that you can only claim the mortgage tax deduction if you itemize your taxes. In reality, only about 35% of taxpayers did before tax reform, and post-tax reform that number is only 11.4%. If you are like the other 89% of the taxpaying population that claims the standard deduction, you cannot also add on the mortgage tax deduction. So right there, 89% of the population will not (or is not benefiting) from mortgage tax deductions.

How much is the standard deduction you will have to surpass to make it worth it?

2023 standard deductions:

  • $13,850 for single filers
  • $13,850 for married, filing separately
  • $27,700 for married filing jointly
  • $20,800 for head of household

2024 standard deductions:

  • $14,600 for single filers
  • $14,600 for married, filing separately
  • $29,200 for married filing jointly
  • $21,900 for head of household

The standard deduction was recently almost doubled due to tax reform.

The SALT Deduction Limit Further Limits the Benefits of Homeownership

As a result of the 2018 tax reform law, the ‘state and local tax deduction’ (aka the “SALT deduction”), including property taxes, is now limited to $10,000 ($5,000 per person if “married filing separately”). Previously, 100% of SALT tax payments were deductible if you itemized your taxes, unless you were subject to the alternative minimum tax (AMT). Similar to the mortgage tax deduction, you can’t double dip (claim the property tax deduction and the standard deduction).

Running the Numbers on the Mortgage Tax Deduction Benefit

Let’s take a hypothetical situation to crunch some numbers. We’ll assume:

  • You take out a $200K mortgage @ 7% interest over 30 years.
  • In your first full year, you’d be paying about $13,935 in interest and $2,031 in principal.
  • You have property taxes of $4,000 per year.
  • You’re married, and eligible for a $27,700 standard deduction.

Your two big deductions are your mortgage interest and your property taxes. We’ll assume these are your only two, but individual situation may vary. In this example, this would equate to a total itemized deduction of $17,935. You’d have to claim an additional $9,765 in itemized tax deductions just to break even with the standard deduction.

In the process, without additional deductions, you will have paid $17,395 that you’ll never get back in order to lose tax benefits! 

And what if you have a smaller mortgage, lower property taxes, or a mortgage with lower interest rates than this? Your “benefit” is even worse. Nobody would make that trade, of course, but it’s a highly realistic situation that shows you just how feeble the “buy a home for the deduction” advice is, particularly in a post-tax reform, higher standard deduction reality.

And the longer you pay off your mortgage, the less of your mortgage payment goes to interest – and the less you can deduct from your taxes. In other words, every passing year equates to a lower tax benefit. This is one of the reasons why I’m a fan of paying off your mortgage early.

This highlights the importance of running the numbers for your own situation before buying a home. You may find that unless you buy a very pricey home, the tax benefit for you is going to be minimal, potentially even negative compared to the standard deduction.

The reality is that the tax advantages that come from a mortgage interest tax deduction are over-rated at best and can actually be non-existent for some home buyers. And that’s, in part, why home ownership as the “American dream” is not all it’s cracked up to be.

Mortgage Deduction Discussion:

  • Have you heard the advice of buying a home for the mortgage tax deduction?
  • Have you bought a home based on this advice?
  • What factors would you recommend when considering whether to buy a home?

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