Understanding Mortgage Interest Deductions
Buying a home in California is a major financial decision, but it also comes with long-term tax advantages. When structured correctly, your mortgage can lower your tax liability through deductions, credits, and strategic planning. These benefits are often overlooked or underused, especially by first-time buyers.
At LBC Mortgage, we do more than find you a great rate. We help you understand and capture every available tax benefit so that your home financing works smarter for your long-term financial goals.
Federal limits on interest deductions
One of the most well-known tax benefits for homeowners is the ability to deduct mortgage interest. If you itemize deductions on your federal tax return, you may be able to deduct interest paid on a qualified home loan. For mortgages taken out after December 15, 2017, the IRS allows interest deductions on mortgage debt up to $750,000, or $375,000 if married filing separately.
Older mortgages issued before this date may still qualify for the higher $1 million cap. These limits apply across all properties you own, including your primary and secondary homes.
Many borrowers don’t realize that going over the limit doesn’t make the interest nondeductible—it simply reduces the deductible portion. At LBC Mortgage, we analyze your loan structure carefully to ensure your mortgage fits within the best thresholds for your situation.
First and second mortgages
If you have both a first mortgage and a second mortgage, such as a home equity loan, the combined debt is subject to the same limits. However, how the funds are used determines whether the interest on the second mortgage is deductible. If it’s used to improve your home, it may still qualify under IRS rules. We walk you through the specifics and advise on how to keep both loans tax-efficient.
California’s Mortgage Credit Certificate (MCC) Program
What is the MCC?
California offers an additional benefit through the Mortgage Credit Certificate (MCC) program. This program is designed primarily for first-time homebuyers and provides a federal tax credit based on a percentage of the mortgage interest you pay. Unlike a deduction, which reduces your taxable income, a credit directly reduces the amount of tax you owe.
MCC credits typically range from 10% to 20% of your annual mortgage interest, with the remaining interest still deductible. This can result in substantial tax savings, especially in the early years of your loan when interest payments are highest.
How we help you qualify
Not all lenders are approved to offer MCCs, and not all properties are eligible. LBC Mortgage is experienced in guiding clients through the MCC application process. We verify your eligibility, ensure your loan terms comply with MCC requirements, and help you file the correct paperwork. This way, you don’t leave thousands of dollars in credits on the table.
Property Tax Deductions and SALT Limits
The state and local tax deduction cap
Homeowners in California often pay high property taxes. Fortunately, property taxes are deductible on your federal tax return, but the deduction is subject to a limit. The state and local tax (SALT) cap restricts total deductions for property tax and state income tax to $10,000 per year for individuals and couples filing jointly.
This cap has been in place since the 2018 tax reform and can significantly limit the tax benefit of owning a home in high-tax states like California. We help you understand how this cap affects your deductions and what strategies might help you maximize your overall tax position.
Potential legislative changes
There are proposals to raise the SALT cap to $40,000 for households earning under $500,000. If this change is enacted, many California homeowners could see a substantial increase in their deductible property taxes. LBC Mortgage stays on top of tax law updates so you’re never caught off guard. When these changes happen, we’re ready to adjust your strategy.
Using Home Equity for Tax-Advantaged Improvements
When HELOC interest is deductible
Home equity loans and home equity lines of credit (HELOCs) can be powerful tools when used for home improvement. Under current IRS rules, interest on home equity debt is only deductible if the loan is used to buy, build, or substantially improve the property that secures the loan.
Using these funds for other purposes, such as paying off credit cards or covering education costs, will make the interest nondeductible. We advise clients to use equity funds strategically and to keep good records showing how the money was spent. This ensures your interest deductions remain valid.
Structuring home improvements wisely
If you’re planning a renovation or major upgrade, we can help structure your loan so that the proceeds qualify under the tax code. We also assist in tracking expenses to make sure every dollar can be properly justified if needed for tax purposes.
Timing Your Refinance for Tax Benefits
Refinance loans and interest deductions
Refinancing your mortgage doesn’t automatically eliminate your ability to deduct interest. If the new loan replaces your original acquisition debt and doesn’t exceed the original principal balance, the interest may still be fully deductible.
However, if you take out a larger loan and use the extra funds for something other than improving your home, the additional interest may not qualify for deductions. We work with you to determine how much you can refinance while keeping your interest deductible.
Capital improvements after refinance
Home improvements made after a refinance can still count toward deductible interest if loan proceeds are used directly for those purposes. We recommend clear documentation of expenses, contracts, and invoices so you can defend your deductions later if needed.
Capital Gains Exclusion When You Sell
Excluding profits from taxes
When it’s time to sell your home, you may be eligible for a capital gains exclusion. If the home has been your primary residence for at least two of the last five years, you can exclude up to $250,000 in profit from taxes if you’re single, or $500,000 if you’re married and filing jointly.
This benefit is especially valuable in California, where property values have risen dramatically. At LBC Mortgage, we advise clients to track their basis in the home—including purchase price and qualified improvements—so that when you sell, your gain is correctly calculated and your exclusion is fully utilized.
Timing your sale
Strategic timing can also help you qualify for the capital gains exclusion. If you’re close to meeting the two-year residency requirement or nearing the gain threshold, we help you evaluate your options and time your sale for maximum benefit.
How LBC Mortgage Helps You Maximize Tax Benefits
LBC Mortgage isn’t just your loan provider—we’re your partner in financial planning. We make sure your loan supports your tax goals by:
- Structuring your mortgage within federal deduction limits
- Guiding you through the MCC application process
- Monitoring tax law changes that affect your deductions
- Planning refinances and home improvements for tax efficiency
- Helping you prepare for capital gains exclusions when you sell
Every step of the way, we’re here to make sure your mortgage is not just a cost—but a tool for building wealth.
