Homeownership taxes can significantly impact your financial planning and overall net worth.
Property taxes are levied by local governments based on the assessed value of your home. These taxes fund public services like schools, roads, and emergency services. Your home’s value is assessed periodically. The tax rate, or millage rate, is applied to this value. The IRS allows you to deduct property taxes on your federal income tax return, subject to the SALT (State and Local Taxes) cap. The original Tax Cuts and Jobs Act (TCJA) of 2017 set this cap at $10,000. OBBBA (Sec. 70120) raised it to $40,000 for 2025, with the limit growing 1% per year through 2029 and then snapping back to $10,000 for 2030 and beyond ( IRC §164(b)(7)). The raise is heavily attenuated for the readers of this book: the cap is reduced by 30 cents for every dollar of MAGI above $500,000 (indexed at 1% per year), with a hard floor of $10,000 — so a single filer or joint filer with MAGI around $606,000 is already back to the old $10K cap. On a Tier-1 California property at a Prop 13 base of 1.2%, a $3M home generates $36,000 of property tax alone, consuming most or all of the available cap before state income tax even enters the conversation. The canonical home for SALT mechanics is section “Tax Deductions of The Mortgage Interest” and the taxation chapter; some states also offer exemptions that reduce the taxable value of your home.
The mortgage interest deduction allows you to deduct interest paid on your mortgage. It incentivize homeownership by allowing you to deduct interest paid on a mortgage for a primary or secondary residence from your taxable income. For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). For older mortgages, the limit is $1 million. You must itemize deductions on Schedule A of Form 1040 to claim this deduction. See IRS Pub. 936, “Home Mortgage Interest Deduction” and section “Tax Deductions of The Mortgage Interest” for details. In states like California, the mortgage indebtedness deduction limit is $1,000,000. Layer on OBBBA’s “2/37 rule” (Sec. 70111, effective 2026), which caps the federal tax-reduction value of every itemized-deduction dollar at roughly 35 cents for filers in the 37% bracket; the headline marginal-rate benefit you might have penciled in (37 cents back on every dollar of interest) is overstated by about 2 cents at the top. Weigh the whole package against the benefits of the standard deduction — complete a “what-if” tax calculation to get a clear picture of cash-flow impact. Model the possibility that you will donate assets or die before liquidating them, thereby avoiding capital gains tax.
When you sell your home, you may be subject to capital gains tax on the profit. For assets held over a year, long-term capital gains tax rates range from 0% to 20% + possibly net investment income tax (NIIT) (section “Net Investment Income Tax (NIIT)”), depending on your income bracket.
Under IRC §121, “Exclusion of gain from sale of principal residence”, you can exclude up to $250,000 ($500,000 for married couples) of capital gains if the home was your primary residence for at least two of the last five years. Special rules apply for military personnel, certain government employees, and those with health issues.
See section “Selling Houses” for details. Some jurisdictions impose taxes on the transfer of property ownership.
The Inflation Reduction Act of 2022 expanded two residential energy credits: the Residential Clean Energy Credit ( IRC §25D) — 30% of the cost of solar, wind, geothermal, battery, and fuel-cell systems — and the Energy Efficient Home Improvement Credit ( IRC §25C) — 30% of qualifying efficiency improvements, subject to annual dollar limits. However, OBBBA terminated both credits for property placed in service after December 31, 2025, so they are no longer available.
For more detailed information, refer to IRS Pub. 530, “Tax Information for Homeowners” and consult local tax authority websites.