Homeownership Taxes

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 and $40,400 for 2026, 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 $505,000 in 2026 (the threshold is indexed 1% a year alongside the cap), with a hard floor of $10,000 — so a single filer or joint filer with MAGI around $606,300 is already back to the old $10K cap. On a Tier-1 California property at a Prop 13 base of $\sim$ 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.

Since the deduction is largely gone for you, the lever that remains is the assessment itself — and unlike the cap, it is negotiable. Two California mechanics are worth knowing by name, and most states have analogues:

Proposition 8 decline-in-value review: Prop 13 sets your base year value and caps its growth at 2%; Proposition 8 requires the assessor to enroll the lesser of that factored base year value or current market value. In any year the market has fallen below your trended assessment — after a broad downturn, or when you overpaid — you may file for a decline-in-value review, and if the informal review fails, a formal appeal with the county Assessment Appeals Board. The deadline is statutory and short (September 15 or November 30 depending on the county), it is missed far more often than it is met, and the reduction is temporary: the assessor restores value as the market recovers, capped at your original Prop 13 trajectory. Free money for the price of pulling three comparable sales.
Proposition 19 base-year transfer: Under Proposition 19 , a homeowner over 55 or severely and permanently disabled may carry their existing base year value to a replacement home anywhere in California, up to three times; a homeowner whose home was destroyed in a Governor-declared wildfire or disaster may do the same, with no limit on the number of transfers. Buy a more expensive home and only the difference is added to the transferred base. The claim must be filed within three years of buying or completing the replacement home. For a long-tenured owner sitting on a 1990s assessment, this is frequently worth more per year than every deduction discussed in this section combined, and it is forfeited by anyone who simply does not file the claim. Prop 19’s other half — the near-elimination of the parent-child reassessment exclusion — is an estate-planning problem and is treated in section “The Other Step: California Proposition 19 and the Property-Tax Reassessment Trap”.

Outside California the appeal machinery differs in name but not in shape, and the sequence below is worth two hours of a Saturday. Price the prize first: an assessment reduction persists until the next reassessment cycle, not just one year, so trimming $1,200 off an annual bill is worth $5,000 to $10,000 over a typical three-to-six-year cycle, and far more where the correction resets an acquisition-value base year that follows you for as long as you own the house. That is the actual return on the afternoon.

Read the record card before anything else.: Every assessor keeps a property record with your square footage, bed and bath count, lot size, and improvements. Factual errors are common, and a house carded as four bedrooms when it has two is corrected administratively — no hearing, no comparables, no filing fee. Start here because it is the only step that can end the matter in one phone call.
Learn the assessment ratio before you celebrate or panic.: Many jurisdictions assess at a statutory fraction of market value, not at full value. An $80,000 assessment on a $100,000 house is not a bargain if the ratio is 80% — it is exactly correct. Compare like with like or you will argue the wrong case.
Know which of the two grounds you are arguing.: Over-valuation says the assessment exceeds market value, and it is proved with recent sales. Lack of uniformity — unequal appraisal — says your assessment is out of line with comparable properties even if it is defensible in absolute terms, and it is proved with neighbors’ assessments, not sales. The second ground is the one most owners never raise, it is statutory in several states, and it wins cases where the market-value argument fails outright in a rising market.
Select comparables with discipline.: Same submarket and a tight radius, sales that closed inside the assessment window, not after it, square footage within roughly 10–15%, similar age and lot. Three good comparables beat ten loose ones, and a board that catches you stretching stops reading.
Audit your exemptions separately from the value.: Homestead, senior, veteran, and disability exemptions, plus assessment freezes and deferrals, are nearly always applied for, not granted automatically, and an unclaimed one is a recurring overpayment that no valuation argument fixes. Confirm each one you qualify for appears as a line item on the bill.

Two risks before filing: some jurisdictions permit the review board to raise an assessment it finds too low, so confirm the local rule before you file a marginal case. And decline the contingency-fee solicitations that arrive with the notice: on a residential appeal built from public records, a share of multi-year savings is a large fee for work you can do yourself, and a certified appraisal at a few hundred dollars is the better purchase when the case genuinely needs one.

The mortgage interest deduction lets you deduct interest paid on acquisition debt for a primary or one designated second residence. For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of that debt ($375,000 if married filing separately); for older mortgages the grandfathered limit is $1 million. That $750,000 cap was scheduled to sunset back to $1 million after 2025 — OBBBA (Sec. 70108) made it permanent, along with the disallowance of interest on home-equity debt not used to buy, build, or substantially improve the residence. Stop waiting for the reversion; plan around $750,000. You must itemize on Schedule A of Form 1040 to claim any of it. 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. OBBBA terminated both. The §25D credit is gone for expenditures made after December 31, 2025 (Sec. 70506); the §25C credit is gone for property placed in service after December 31, 2025 (Sec. 70505). The distinction matters only if you paid in 2025 for work finished in 2026 — check which test your project falls under before you claim anything. Prospectively, both are dead; price solar and efficiency upgrades on their underlying standalone economics, not a credit that no longer exists.