STRATEGY PAPER

Tax Implications of Buying vs Renting

The deduction that might not exist for you.
Last reviewed March 2026 · DwellQ Research8 SOURCES

Key Findings

01Mortgage interest deduction limited to $750K loan balance
02SALT cap raised to $40K (2025–2029) from $10K — biggest change since 2017
03Standard deduction $15,750/$31,500 means many buyers don’t benefit from itemizing
04High-tax state buyers (NY, NJ, CA) see largest benefit from SALT increase
05Capital gains exclusion ($250K/$500K) shelters most primary residence gains
06Tax benefits are often overstated by 40–60% in conventional calculators

Mortgage Interest Deduction

The mortgage interest deduction allows homeowners to deduct interest paid on up to $750,000 of mortgage debt. On a $600K loan at 6.1%, first-year interest is approximately $36,600. However, this deduction has value only if your total itemized deductions exceed the standard deduction.

The Standard Deduction Threshold

For 2025, the standard deduction is $15,750 (single) and $31,500 (married filing jointly). A married couple must accumulate more than $31,500 in itemized deductions before the mortgage interest deduction provides any incremental tax benefit. For many buyers—especially those with smaller mortgages or in low-tax states—total itemized deductions don’t reach this threshold.

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SALT Cap Impact

The SALT cap was raised from $10,000 to $40,000 for 2025–2029 under the One Big Beautiful Bill Act. This is the biggest change for homeowners since 2017. In high-tax states (NY, NJ, CA), the increased cap allows deducting up to $40K in combined state income tax and property taxes, pushing more homeowners over the standard deduction threshold. In no-income-tax states (TX, FL, WA), the impact is minimal.

Capital Gains Exclusion

When selling a primary residence, individuals can exclude up to $250K ($500K married) in capital gains from federal income tax under Section 121, provided they’ve lived in the home for 2 of the last 5 years. This effectively shelters most primary residence gains for the majority of homeowners. However, investment properties and short-term holdings do not qualify.

THE BOTTOM LINE
Tax benefits are real but frequently overstated. Whether you benefit depends on income, state, filing status, and whether itemized deductions exceed the standard deduction.

Frequently Asked Questions

Do I actually save on taxes by buying a home?+
Only if your total itemized deductions (mortgage interest + property tax + state income tax, subject to SALT cap) exceed the standard deduction. For many buyers, especially those with sub-$500K mortgages in low-tax states, the answer is no.
How does the SALT cap change affect me?+
If you’re in a high-tax state (NY, NJ, CA) and your combined SALT exceeds $10K, the new $40K cap lets you deduct more. A NY homeowner with $22K SALT in the 24% bracket saves ~$2,880/yr vs the old cap. TX/FL/WA homeowners see zero change.
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RELATED ANALYSIS
How the 2025 SALT Cap Changes Affect Rent vs BuyHow Much Home Can I Actually Afford?
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METHODOLOGY
DwellQ research uses a net worth comparison framework. Both paths—buying (building equity minus all ownership costs) and renting (investing the down payment plus monthly surplus)—are modeled month-by-month over the full holding period. Assumptions are documented, sensitivity-tested, and sourced from publicly available data. This is scenario analysis, not financial advice.
SOURCES & REFERENCES
  1. IRS. Publication 936: Home Mortgage Interest Deduction.[irs.gov]
  2. IRS. Publication 530: Tax Information for Homeowners.[irs.gov]
  3. IRS. Topic No. 701: Sale of Your Home (Section 121 Exclusion).[irs.gov]
  4. IRS. Standard Deduction Amounts, Tax Year 2024.[irs.gov]
  5. Tax Foundation. State and Local Tax (SALT) Deduction Cap Analysis.[taxfoundation.org]
  6. Joint Committee on Taxation. Federal Tax System Overview, 2024.[jct.gov]
  7. Tax Policy Center. Distribution of the Mortgage Interest Deduction.[taxpolicycenter.org]
  8. Congressional Research Service. The SALT Deduction: Overview and Analysis.[crs.gov]