Understanding Real Estate Taxes and Mortgage Interest Deductions Under IRS Rules
- sarahacraddock
- Jan 21
- 3 min read
Understanding Real Estate Taxes and IRS Mortgage Interest Exemptions
Real estate taxes are a fundamental cost of property ownership, yet they are often misunderstood. Beyond annual property tax bills, homeowners and investors must also consider how federal tax rules—particularly those established by the Internal Revenue Service (IRS)—affect the true cost of owning real estate. One of the most significant tax benefits available to property owners is the mortgage interest deduction, which can substantially reduce taxable income when applied correctly.
Property Taxes: The Foundation of Real Estate Taxation
Property taxes are assessed and collected at the local level, typically by counties or municipalities. These taxes are based on the assessed value of the property and fund essential public services such as schools, infrastructure, emergency services, and local government operations. While rates and assessment methods vary by jurisdiction, property taxes are generally unavoidable for owners and must be paid annually or semi-annually.
For federal income tax purposes, property taxes paid on a primary residence or investment property may be deductible as an itemized deduction. However, under current IRS rules, the deduction for state and local taxes (commonly referred to as the SALT deduction) is capped at $10,000 per year for individuals and married couples filing jointly. This limitation has made strategic tax planning increasingly important for property owners, especially in higher-tax areas.
Mortgage Interest Deduction: A Key IRS Exemption
The mortgage interest deduction is one of the most widely used and valuable tax benefits associated with homeownership. The IRS allows taxpayers who itemize deductions to deduct interest paid on qualified home loans for a primary residence and, in many cases, a second home.
Under current IRS guidelines, mortgage interest is deductible on loan balances of up to $750,000 for mortgages taken out after December 15, 2017. For loans originated before that date, the limit is $1 million. These thresholds apply to combined mortgage debt, including both primary and secondary residences.
To qualify, the loan must be a secured debt, meaning the property serves as collateral. Interest paid on unsecured personal loans does not qualify, even if the funds were used for real estate purposes.
Home Equity Loans and HELOCs
Interest paid on home equity loans or home equity lines of credit (HELOCs) may also be deductible, but only under specific conditions. The IRS requires that the borrowed funds be used to buy, build, or substantially improve the property securing the loan. If a homeowner uses a HELOC for unrelated expenses—such as credit card consolidation or travel—the interest is not deductible, regardless of the loan amount.
This distinction is critical, as misuse of home equity funds can result in lost deductions and potential issues during an IRS audit.
Investment Property Considerations
For real estate investors, mortgage interest is typically treated as a business expense rather than an itemized personal deduction. Interest paid on loans for rental or commercial properties can generally be deducted in full against rental income, subject to passive activity loss rules and other IRS limitations.
Additionally, investors may deduct property taxes, insurance, maintenance costs, and depreciation, making real estate a particularly tax-efficient asset class when managed properly. Unlike owner-occupied homes, the SALT deduction cap does not apply in the same way to business expenses associated with investment properties.
Points, PMI, and Other Deductible Costs
Certain additional financing costs may also be deductible. Mortgage points—fees paid upfront to reduce the interest rate—may be deductible either in the year paid or over the life of the loan, depending on the circumstances. Private mortgage insurance (PMI) premiums have historically been deductible, though this provision is subject to periodic renewal by Congress and income phaseouts, making it important to confirm eligibility each tax year.
Itemizing vs. Standard Deduction
To benefit from mortgage interest and property tax deductions on a primary residence, taxpayers must itemize deductions rather than take the standard deduction. With higher standard deduction amounts introduced in recent years, fewer households itemize than in the past. As a result, the tax benefits of homeownership may vary significantly depending on income level, loan size, and overall tax profile.
The Importance of Professional Guidance
Real estate tax rules are complex and subject to change. While IRS exemptions such as the mortgage interest deduction can provide meaningful savings, improper application can lead to missed opportunities or compliance issues. Homeowners and investors should maintain detailed records of interest paid, loan documents, and property tax statements, and consult with qualified tax professionals when making real estate or financing decisions.
Conclusion
Real estate taxes extend well beyond the annual property tax bill. Understanding IRS exemptions—particularly mortgage interest deductions—can help property owners reduce their tax burden and make more informed financial decisions. Whether purchasing a primary residence or building a real estate portfolio, strategic tax planning remains an essential component of successful property ownership.
For more information visit irs.gov or contact a tax professional.
Sarah Craddock, Broker Associate
Blackwater Realty
C: 251-289-7958
O: 228-344-2087