The Short Answer

1. Buying a Home Does Not Automatically Mean Itemizing

Mortgage interest and real property taxes are generally itemized deductions.

Evan and Daisy therefore compare their total allowable itemized deductions with the standard deduction.

For 2024, the standard deduction for married taxpayers filing jointly was:

$29,200

So the real question is not simply:

“Did we pay mortgage interest?”

It is:

“Do all of our itemized deductions together exceed the standard deduction?”

Those deductions can include qualifying mortgage interest, state and local taxes, charitable contributions, and certain other expenses.

IRS — Standard vs. Itemized Deductions

2026 Update

For 2026, the standard deduction for married taxpayers filing jointly is:

$32,200

So deductible housing costs still matter only to the extent total itemized deductions produce a better result.

IRS — 2026 Tax Inflation Adjustments

2. How Much Mortgage Interest Is Deductible?

For acquisition debt incurred after December 15, 2017, federal law generally limits the mortgage-interest deduction to interest attributable to the first:

$750,000 of qualifying home acquisition debt

or $375,000 for married taxpayers filing separately.

The loan generally must be secured by a qualified home and used to buy, build, or substantially improve it.

IRS — Publication 530, Home Mortgage Interest

Evan and Daisy expect a mortgage of about:

$629,000

That is below the $750,000 federal debt limit.

So the debt ceiling itself should not reduce their deduction under the facts in the Episode.

The deduction is based on qualifying interest paid—not the mortgage balance itself—and they generally must itemize to receive the federal benefit.

The $750,000 limit applies across qualifying acquisition debt on a main home and second home rather than giving each property its own separate limit.

IRS — Publication 936, Home Mortgage Interest Deduction

2026 Update

For 2026 and later years, IRC §163(h)(3)(F) continues the $750,000/$375,000 acquisition-debt limitation for qualified residence interest.

IRC §163 — Interest

3. Property Taxes Are Subject to the SALT Limit

Qualified real property taxes can generally be deducted on Schedule A when a taxpayer itemizes.

At closing, property taxes are generally allocated between buyer and seller based on their respective ownership periods.

IRS — Publication 530, Real Estate Taxes

But property taxes are part of the broader state and local tax, or SALT, deduction.

For 2024, the federal SALT deduction was generally limited to:

$10,000 for married taxpayers filing jointly

That limit generally included qualifying state and local income or sales taxes plus real property taxes.

So paying $10,000 of property tax did not necessarily mean Evan and Daisy received another $10,000 deduction on top of California income taxes already paid.

2026 Update

For 2026, the general SALT limit for joint filers is:

$40,400

The limit begins to decrease when modified AGI exceeds $505,000, but generally cannot be reduced below $10,000.

IRS — 2026 SALT Limitation

This is one of the biggest differences between Evan and Daisy’s 2024 story and a similar home purchase in 2026.

4. What About PMI?

Evan and Daisy put 10% down, so their lender estimate includes private mortgage insurance, or PMI.

2024

For their 2024 tax year, qualified mortgage insurance premiums were not deductible as an itemized deduction.

So Evan’s answer in the Episode—

“No.”

—was correct.

2026 Update

Beginning in 2026, qualified mortgage insurance premiums are again treated as qualified residence interest for federal purposes.

The deduction begins to phase out when AGI exceeds $100,000, or $50,000 for married taxpayers filing separately.

Under the statutory phaseout formula, the deduction is fully eliminated once AGI exceeds $109,000, or $54,500 for married taxpayers filing separately.

Certain prepaid qualified mortgage insurance premiums may also have to be allocated over the shorter of the mortgage term or 84 months. As a result, the amount paid at closing may not equal the amount deductible in that year.

So in 2026 the answer becomes:

“Potentially—if the taxpayer itemizes and the income limitation does not eliminate the deduction.”

IRC §163 — Qualified Mortgage Insurance

Treas. Reg. §1.163-11 — Prepaid Qualified Mortgage Insurance

5. What About Points and Closing Costs?

Mortgage points are generally prepaid interest.

They are usually deducted over the life of the loan, but points paid to buy or build a main home can sometimes be deducted in full in the year of purchase if the requirements are met.

Seller-paid points can also receive special treatment. If qualifying seller-paid points are treated as paid by the buyer and deducted by the buyer, the buyer generally reduces the home’s basis by those points.

IRS — Publication 530, Points

Other closing costs require a different analysis.

Some amounts may be currently deductible, such as qualifying mortgage interest, real property taxes, and deductible points.

Certain purchase-related costs—such as attorney’s fees related to acquiring the property, owner’s title insurance, recording fees, and transfer taxes—may instead increase the home’s tax basis.

Loan-related charges generally require separate review. For example, lender-related credit-report or appraisal charges generally do not become part of the home’s basis merely because they appear on the Closing Disclosure.

That is why the Closing Disclosure should be retained rather than treated as a list of deductions.

IRS — Publication 530, Settlement or Closing Costs

6. The Down Payment Is Not a Deduction—and the Down-Payment Percentage Does Not Determine Basis

Evan spends much of the Episode deciding between 10% and 20% down.

That decision affects cash flow, borrowing, PMI, monthly payments, and how much cash remains after closing.

But the down payment itself is not a tax deduction.

At the same time, the down payment is part of the amount Evan and Daisy pay to acquire the home.

Their basis is not limited to the amount of their down payment. It generally starts with the full cost of acquiring the property—regardless of how much of that cost is paid in cash versus financed—and can include certain qualifying acquisition costs.

So putting 10% down instead of 20% does not mean they have only 10% of the home’s tax basis.

Later capital improvements can increase basis.

Ordinary repairs and maintenance generally do not.

IRS — Publication 530, Basis of a Home

For that reason, homeowners should retain the Closing Disclosure, purchase documents, property-tax records, Form 1098, and records of future capital improvements.

Those documents may matter years later when the property is sold.

7. California Can Produce a Different Result

California does not conform to every federal homeowner rule.

Mortgage Interest

For California purposes, the acquisition-debt limit is generally:

$1,000,000

or $500,000 for married taxpayers filing separately.

California therefore does not conform to the federal $750,000/$375,000 limitation.

That difference does not affect Evan and Daisy on the approximately $629,000 mortgage in the Episode because their debt is already below the federal ceiling.

California FTB — Deductions

State and Local Taxes

California also does not conform to the federal SALT cap.

But that does not mean every state or local tax becomes deductible on the California return.

California separately disallows deductions for state and local income taxes, State Disability Insurance (SDI), and state and local general sales taxes.

Real property taxes may remain deductible for California purposes, subject to California’s own limitations.

California FTB — Schedule CA Instructions

PMI

Beginning in 2026, federal law again treats qualifying mortgage insurance premiums as qualified residence interest, subject to the federal limitations.

California does not conform to that federal PMI provision.

So a homeowner may receive a federal PMI deduction in 2026 without receiving the same California deduction.

California FTB — Summary of Federal Income Tax Changes

What Changed Between 2024 and 2026?

The main differences are:

Standard deduction

2024 MFJ: $29,200
2026 MFJ: $32,200

Federal acquisition-debt limit

2024: generally $750,000
2026: generally $750,000

Federal SALT limit

2024: generally $10,000 MFJ
2026: generally $40,400, subject to the income-based reduction

Qualified mortgage insurance

2024: not deductible
2026: potentially deductible federally, subject to the applicable phaseout

So the tax analysis in Evan and Daisy’s 2024 story remains correct.

A buyer making the same purchase in 2026, however, may receive a different answer for SALT and PMI.

Common Mistakes

“Buying a house automatically gives me a mortgage-interest deduction.”

Not necessarily. The interest must qualify, and the taxpayer generally must itemize to receive a federal benefit.

“My entire mortgage payment is deductible.”

No. Mortgage principal is not deductible as a personal itemized deduction.

“All property taxes are deductible.”

Not necessarily. Federal SALT limitations can restrict the deduction, and California applies its own rules.

“PMI is never deductible.”

That was true for Evan and Daisy in 2024. Beginning in 2026, qualifying PMI may again be federally deductible, subject to the applicable income limitation.

“Every closing cost is deductible.”

No. Some costs may be deductible, some may increase basis, and some may do neither.

“A larger down payment creates a larger tax basis.”

Not generally. The down-payment percentage changes how the purchase is financed; it does not determine the cost basis of the entire home.

The Key Distinction

For Evan and Daisy, the tax consequences of buying the house fall into three groups.

1. Qualifying mortgage interest and property taxes may create current itemized deductions.
2. Some purchase costs may not be deductible now but can become part of the home’s tax basis and matter later.
3. Major cash outflows such as the down payment, mortgage principal, homeowners insurance, repairs, and reserves are primarily financial decisions rather than current tax deductions.

The deductions can change the after-tax cost of the house.

They do not determine whether the house is affordable.

Reference

IRS — Publication 530, Tax Information for Homeowners
Current IRS guidance on property taxes, points, seller-paid points, closing costs, basis, and homeowner records.
IRS — Publication 530

IRS — Publication 936, Home Mortgage Interest Deduction
Current IRS guidance on qualified mortgage interest and acquisition-debt limitations.
IRS — Publication 936

IRC §163 — Interest
Current statutory authority for qualified residence interest, the acquisition-debt limitation, and qualified mortgage insurance premiums.
IRC §163

Treas. Reg. §1.163-11 — Allocation of Certain Prepaid Qualified Mortgage Insurance Premiums
Current regulation governing the allocation of certain prepaid qualified mortgage insurance premiums over the shorter of the mortgage term or 84 months.
Treas. Reg. §1.163-11

IRS — 2026 Tax Inflation Adjustments
Current IRS guidance confirming the 2026 standard deduction and other inflation-adjusted amounts.
IRS — 2026 Tax Inflation Adjustments

IRS — 2026 SALT Limitation
Current IRS guidance confirming the $40,400 SALT limit for 2026 joint filers and the MAGI-based reduction beginning above $505,000.
IRS — 2026 SALT Limitation

California FTB — Deductions
Current California guidance on itemized deductions, including California’s generally higher home acquisition-debt limitation.
California FTB — Deductions

California FTB — Schedule CA Instructions
Current California guidance on differences involving state and local taxes and home mortgage interest.
California FTB — Schedule CA Instructions

California FTB — Summary of Federal Income Tax Changes
Current FTB guidance explaining California nonconformity to the 2026 federal mortgage-insurance provision and other federal changes.
California FTB — Federal Income Tax Changes

See This Rule in the Story

Episode 04 — The House

Evan and Daisy are deciding whether to put 10% or 20% down on their first home.

The deductions matter.

But so do PMI, repairs, the mortgage payment, and the cash left after closing.

For them, the bigger question is not how much the tax code gives back.

It is how much cash they want left after they get the keys.

READ EPISODE 04 →