What tax credits and deductions exist for homebuyers

The federal government does not offer a single tax credit for buying a house. What exists instead are specific credits tied to energy-efficient improvements, a deduction for mortgage interest you paid during the year, and a one-time exclusion on capital gains if you sell a home you lived in. Which one applies to you depends on what you bought, when you bought it, and what you did to the house after purchase.

The most common tax benefit for homeowners is the mortgage interest deduction, which lets you deduct the interest portion of your mortgage payments from your taxable income — but only if you itemize deductions on your tax return instead of taking the standard deduction. This is not a credit that reduces your tax dollar-for-dollar; it reduces the income that gets taxed in the first place.

If you made energy-efficient upgrades to your home — such as installing a heat pump, solar panels, or an electric water heater — you may be able to claim the Residential Energy Credit on your federal tax return. This credit covers a percentage of what you spent on the upgrade itself, not the purchase of the house.

Key Takeaways

  • There is no federal tax credit straightforward for buying a house, but homeowners can deduct mortgage interest if they itemize deductions on their tax return.
  • The Residential Energy Credit covers a percentage of the cost of energy-efficient upgrades like solar panels, heat pumps, and insulation, and the percentage varies by the type of upgrade.
  • If you sell a home you lived in for at least two of the past five years, you can exclude up to $250,000 (or $500,000 if married filing jointly) of the gain from your taxable income.
  • First-time homebuyer credits are not currently available at the federal level, though some states and cities offer their own programs.
  • The mortgage interest deduction only benefits you if your total itemized deductions exceed the standard deduction for your filing status.

The mortgage interest deduction and how it works

When you pay your mortgage each month, part of that payment goes toward interest and part goes toward principal. Only the interest portion can be deducted from your taxable income, and only if you itemize deductions on Schedule A of your tax return.

For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If your mortgage interest plus other deductions (such as state and local taxes, charitable donations, and property taxes) add up to more than the standard deduction for your filing status, itemizing saves you money. If they do not, you are better off taking the standard deduction and skipping the mortgage interest deduction.

Your mortgage lender sends you a Form 1098 each January showing how much interest you paid during the previous year. You use this figure when you itemize. Keep in mind that in the first years of a mortgage, most of your payment goes toward interest, so the deduction is larger early on. As you pay down the principal, the interest portion shrinks.

The Residential Energy Credit for home improvements

If you installed energy-efficient equipment or made energy-saving improvements to your home, you may be able to claim the Residential Energy Credit (also called the Energy Efficient Home Improvement Credit). This credit covers a percentage of what you spent on the upgrade, and the percentage depends on the type of improvement.

may have access to improvements include solar panels, geothermal heat pumps, air-source heat pumps, electric water heaters, battery storage systems, insulation, windows, doors, and roofs. The credit covers 30 percent of the cost for most of these improvements through 2032, though some items have different percentages or caps. You claim this credit on Form 5695 when you file your tax return.

The credit applies to improvements you made to your primary residence, not to a second home or investment property. You do not need to be a first-time buyer to claim it, and there is no income limit. The improvement must be new equipment or materials installed in your home; you cannot claim a credit for labor costs alone.

Capital gains exclusion when you sell your home

If you sell a home and make a profit, you may not owe federal income tax on that gain if you meet two conditions: you owned the home for at least two of the five years before the sale, and you lived in it as your primary residence for at least two of those five years.

If you meet these conditions, you can exclude up to $250,000 of the gain from your taxable income if you are single, or up to $500,000 if you are married filing jointly. This exclusion is available once every two years. If your gain exceeds the exclusion amount, you owe tax on the remainder.

This is not a credit or deduction; it is an exclusion that keeps part of your gain from being counted as income at all. You report the sale on Form 8949 and Schedule D when you file your return, and you claim the exclusion there.

State and local tax credits for homebuyers

While the federal government does not currently offer a tax credit for buying a house, some states and cities do. These programs vary widely by location and change year to year. Some are credits for first-time buyers, others are for low-income buyers, and some are tied to buying in a specific neighborhood or school district.

To find out whether your state or city offers a homebuyer credit, contact your state's housing finance agency or your city's housing department. You can also ask your real estate agent or mortgage lender, as they often know about local programs. These credits are separate from federal taxes and are claimed on your state or local tax return, not your federal return.

Property tax deduction for homeowners

In addition to mortgage interest, homeowners can deduct property taxes paid during the year — but again, only if they itemize deductions. The deduction is capped at $10,000 per year for state and local taxes combined (including property tax, income tax, and sales tax). This cap applies whether you are single or married.

Like the mortgage interest deduction, the property tax deduction only helps you if your total itemized deductions exceed the standard deduction. You report property taxes on Schedule A along with your mortgage interest and other deductions.

When you cannot claim a homebuyer tax credit

If you are buying a home with money from a first-time homebuyer program that offers a tax-free grant or down payment information, that money is not taxable income and you do not owe tax on it. However, this is not a tax credit — it is straightforward money that is not counted as income.

If you received a first-time homebuyer credit in a previous year (such as the temporary credit that ended in 2010), you may have to repay part of it over time. Check your tax records or contact the IRS if you are unsure whether you received such a credit and whether you still owe a repayment.

Frequently Asked Questions

Can I claim the mortgage interest deduction if I take the standard deduction?

No. You can only deduct mortgage interest if you itemize deductions on Schedule A. If you take the standard deduction, you cannot also claim the mortgage interest deduction. You have to choose one or the other.

Do I have to own the house for a certain amount of time to claim the energy credit?

No. You can claim the Residential Energy Credit in the year you install the improvement, regardless of how long you have owned the home. You do not have to wait or meet a minimum ownership period.

What if I sell my house at a loss instead of a gain?

If you sell your home for less than you paid for it, you cannot deduct the loss on your federal tax return. The capital gains exclusion only applies when you have a gain to exclude.

Can I claim both the mortgage interest deduction and the energy credit in the same year?

Yes. The mortgage interest deduction and the Residential Energy Credit are separate and do not interfere with each other. You can claim both in the same tax year if you meet the requirements for each one.

Do I need to report the sale of my home to the IRS even if I do not owe tax on the gain?

Yes. You report the sale on Form 8949 and Schedule D even if the entire gain is excluded. The IRS needs to see the transaction to verify that you meet the requirements for the exclusion.