Introduction

Home-related tax breaks are among the most common tax items on individual returns. They include the mortgage interest deduction, deductions for state and local property taxes, and residential energy credits for qualified upgrades. Used correctly these tax breaks can lower your taxable income or the tax you owe, but they have rules, limits, and documentation requirements. This guide explains how each break works, who qualifies, documentation to keep, practical tips I use in client work, and common pitfalls to avoid.

How the three main home-related tax breaks work

1) Mortgage interest deduction

  • What it is: Homeowners who itemize can generally deduct interest paid on acquisition debt used to buy, build, or substantially improve a qualified home (your main home and one other qualified residence) (IRS, Publication 936).
  • Typical paperwork: Your lender will send Form 1098 reporting mortgage interest paid. You report the deduction on Schedule A (Form 1040) when you itemize.
  • Limits: For mortgages incurred after December 15, 2017, interest on acquisition debt is deductible on up to $750,000 of mortgage principal for married couples filing jointly ($375,000 married filing separately). Earlier acquisition debt limits (generally $1 million) still apply to mortgages originated before that date (IRS guidance). Home equity loan interest is deductible only if the loan proceeds were used to buy, build, or substantially improve the home securing the loan and within the overall limits.
  • Practical notes from my practice: The deduction is most valuable early in a 30-year mortgage when interest makes up a larger share of monthly payments. However, because the Tax Cuts and Jobs Act (TCJA) raised the standard deduction, many taxpayers no longer benefit from itemizing. I run a quick itemize vs. standard deduction calculation annually for clients to confirm the best choice.

2) Property tax deduction (SALT)

  • What it is: Taxpayers who itemize may deduct state and local property taxes paid during the year. These are part of the state and local tax (SALT) deduction on Schedule A.
  • Limit: The SALT deduction, which includes state and local income or sales taxes plus property taxes, is capped at $10,000 per return ($5,000 for married filing separately) under the TCJA. That cap remains in effect as of 2025 unless law changes (IRS guidance).
  • Escrow account nuance: If your mortgage lender pays property taxes from escrow, you can deduct them in the year the lender actually pays the taxing authority, not necessarily the year you were billed. See our page on mortgage escrow and property taxes for timing examples. Understanding mortgage escrow accounts and property taxes

3) Residential energy credits

  • What they are: Federal tax credits reduce the tax you owe dollar-for-dollar for qualifying energy-efficient installations and certain home improvements. Common items include solar panels, small wind turbines, geothermal heat pumps, and qualifying heat pumps or water heaters.
  • How to claim: Home energy credits are claimed on IRS Form 5695 (Residential Energy Credits) and then carried to Form 1040 (IRS, Form 5695).
  • Key program points (current as of 2025): The Residential Clean Energy Credit generally provides a percentage of qualified equipment and installation costs (commonly 30% for many systems placed in service in recent years under the Inflation Reduction Act); the specific rate, eligible technologies, and any bonus provisions (for domestic content or low-income households) can change, so check IRS Form 5695 instructions and the IRS clean energy pages when planning (IRS, Form 5695).
  • Documentation: Keep invoices, manufacturer’s certification statements, and contractor receipts showing equipment, model numbers, and installation dates.

Real-world examples (simplified)

  • Mortgage interest: A homeowner who paid $12,000 in mortgage interest may reduce taxable income by that amount if they itemize. At a 22% marginal federal rate, that could lower taxes by roughly $2,640 (before considering state taxes and AMT impacts).
  • Property tax: If you paid $9,000 in property taxes and $2,000 state income tax, your SALT deduction is limited to $10,000 total; you would deduct $10,000 on Schedule A, not the full $11,000.
  • Energy credit: A homeowner who paid $20,000 for a qualifying solar system and qualifies for a 30% credit could claim a $6,000 credit on Form 5695. If the credit exceeds tax liability, some credits can be carried forward — read the Form 5695 instructions for carryforward rules.

Who benefits and who doesn’t

  • Likely beneficiaries: Homeowners with large mortgage interest payments relative to the standard deduction, homeowners in lower property-tax states who still itemize for other reasons, and those installing qualifying energy systems.
  • Less likely to benefit: Homeowners with small mortgages or those who take the standard deduction (single filers and many married couples after TCJA). High-SALT states: property owners in states with very high property taxes may be constrained by the $10,000 SALT cap and find the deduction less valuable.

Documentation checklist

  • Mortgage interest: Form 1098 from your lender, settlement statements for home purchase or refinance, and amortization schedules if you need to prove interest in dispute (IRS, Publication 936).
  • Property taxes: Receipts, county tax bills, canceled checks or escrow statements showing the tax payment date and amount.
  • Energy credits: Invoices with equipment model numbers, contractor receipts, manufacturer certification, and the date placed in service (retain for at least 3–7 years).

Strategies I use with clients

  • Run an itemize vs. standard deduction calculation each year. Changes in mortgage interest, property taxes, or major medical expenses can flip the outcome.
  • Time deductible payments: If you are close to itemizing this year, consider prepaying some deductible property taxes before year-end (watch for state rules and the IRS timing rules for escrow payments).
  • Pair energy projects with tax planning: If you plan a large qualifying clean energy project, line it up with years when you have sufficient tax liability to use the credits or understand carryforward provisions.
  • Keep a single secure file (digital and physical) for home-related tax documents. I ask each client to upload mortgage closing papers, annual 1098s, property tax receipts, and energy project invoices to our secure portal each year.

Common mistakes and misconceptions

  • “I automatically get mortgage interest as a tax cut.” Not necessarily — mortgage interest is only beneficial if you itemize and if the total itemized deductions exceed your standard deduction.
  • Confusing deductions and credits: Deductions lower taxable income; credits reduce tax liability directly. An energy credit is usually more valuable than a deduction of the same dollar amount.
  • Overlooking caps and limits: The SALT cap and mortgage interest limits are common gotchas.
  • Poor documentation: Missing receipts or manufacturer certification can make it hard to claim or substantiate an energy credit in an audit.

Frequently asked questions

Q: Do I need to itemize to claim energy credits?
A: No. Energy credits are claimed on Form 5695 and applied directly to your tax liability; you do not have to itemize to claim these credits (IRS, Form 5695).

Q: How does refinancing affect mortgage interest limits?
A: If you refinance an existing acquisition debt, the original acquisition date can matter for the $1M vs. $750K limit. Consult IRS Publication 936 or your tax advisor to analyze specific loan history.

Q: Are energy credits refundable?
A: Most residential energy credits are nonrefundable but can often be carried forward to future tax years if you cannot use the full credit the year the property is placed in service. Check the Form 5695 instructions for current carryforward rules.

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Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice. Rules and credit percentages can change; verify current law and IRS guidance or consult a CPA or tax attorney for advice tailored to your situation (IRS, Publication 936; IRS, Form 5695).

Authoritative sources and further reading

  • IRS Publication 936, Home Mortgage Interest Deduction (IRS.gov)
  • IRS Form 5695 and instructions, Residential Energy Credits (IRS.gov)
  • IRS guidance on SALT (state and local taxes) and the $10,000 limit (IRS.gov)
  • Consumer Financial Protection Bureau — homeownership and mortgage primer (consumerfinance.gov)

Final takeaway

Home-related tax breaks can be valuable tools in a homeowner’s tax and financial plan, but they work only when you understand the eligibility rules, limits, and recordkeeping requirements. Each year, review your mortgage interest, property tax exposures, and planned energy projects with a tax pro so you take the credits and deductions you’re entitled to and avoid common mistakes.