Mortgage Interest and SALT for SF Buyers After the 2025 Tax Law

Owning is cheaper than renting after taxes only if you itemize, and only on the first $750,000 of mortgage debt. Anyone who tells you the interest on a $1.5 million San Francisco loan is "deductible" is describing half of it. The 2025 federal tax law locked in that limit, raised the cap on state and local tax deductions for most buyers while phasing it out for high earners, and brought back the PMI deduction for people who mostly do not qualify for it. Here is what the rules are now, applied to SF-sized numbers, so the payment you plan around is the real one.

What the 2025 federal tax law changed for homeowners

The standard deduction is the hurdle. Itemizing only helps to the extent your deductions exceed it.

The $750,000 limit on an SF-sized loan

The limit applies to debt, not interest, so the deductible share is simply $750,000 divided by your loan balance. On a $1.2 million loan you deduct 62.5% of the interest; on $2 million, 37.5%. At a 6.4% rate, interest on $750,000 is about $47,700 in the first year, and that is the ceiling on deductible interest no matter how large the loan.

Two details matter in SF. A piggyback second loan or HELOC used to buy the home counts as acquisition debt and shares the same $750,000 cap. A cash-out refinance later does not add deductible debt unless the money substantially improves the home. Refinancing and the true cost of owning cover the long-run version of this math.

The higher SALT cap, its phase-down, and how SF taxes fit

SALT covers property tax plus either state income tax or sales tax. San Francisco's property tax rate is about 1.18% of assessed value (the Board of Supervisors sets it each fall), which on a $1.5 million purchase is about $17,700 a year. California's 9.3% income tax bracket begins around $73,000 of taxable income for a single filer and double that for a couple, so a household earning enough to buy here typically owes well over $20,000 in state income tax. Property tax plus state income tax reaches the $40,400 cap for most SF buyers, and the excess is simply lost.

The phase-down then takes it back from high earners. For 2026, the cap falls by 30% of modified AGI above $505,000, down to a $10,000 floor. A couple at $600,000 of MAGI loses 30% of $95,000, or $28,500, leaving a cap of $11,900. Above about $606,000 the cap is $10,000. If a bonus or a large RSU vest pushes you over the threshold in a given year, your SALT deduction shrinks that year; timing a vest into the next year is worth a conversation with a tax preparer.

PMI premiums deductible as interest again from 2026

Mortgage insurance premiums are deductible from the 2026 tax year, but the deduction phases out by 10% for every $1,000 of AGI above $100,000 and is gone at $110,000. Those figures are not indexed. For buyers financing an SF home, treat PMI as a fully after-tax cost. Down payment and PMI covers how to shop it instead.

Will you itemize? The standard-deduction test at SF price points

All rows assume 20% down, a 6.4% rate, married filing jointly, and enough California income tax to reach the SALT cap.

You itemize in every row, but the benefit is flat from $1 million up and then shrinks as income rises. Single filers, with a $16,100 standard deduction, gain more from itemizing at the same price.

California state rules that differ from federal

California does not conform to the federal $750,000 limit. The state allows interest on up to $1,000,000 of acquisition debt ($500,000 married filing separately) plus up to $100,000 of home equity debt, and you add back the difference on Schedule CA (540), Part II, line 8, column C. On a $1.2 million loan, about 83% of the interest is deductible for state purposes versus 62.5% federally.

The state has no SALT cap but also does not let you deduct California income tax on the California return; Schedule CA removes it. Property tax is deductible in full on the state return. California's 2025 standard deduction is $5,706 for single filers and $11,412 for joint filers, so nearly every SF homeowner itemizes for state purposes even if they would not federally. Keep both calculations in view; at a 9.3% marginal rate the state deduction is worth real money.

Year one: points, prepaid interest and property tax at closing

Your Closing Disclosure holds several first-year deductions:

• Discount points paid to buy a mortgage on your main home are deductible in the year paid if you itemize and the points are an established practice locally and clearly labeled on the settlement statement (IRS Topic 504). Points on a later refinance are spread over the loan term.
• Prepaid interest from the funding date to month end is interest, deductible subject to the $750,000 limit.
• Property tax prorations you reimburse the seller are deductible as property tax, subject to the SALT cap, as are the installments you pay later.
• Supplemental property tax bills that arrive after the Assessor reassesses the home to your purchase price are deductible when paid. Supplemental tax bills explains why they surprise people.
• Not deductible: HOA dues, homeowners and earthquake insurance, appraisal and inspection fees, title and escrow charges, and transfer tax. Any transfer tax you pay and most closing costs instead add to your cost basis, which helps when you sell.

A worked after-tax payment, and the exclusion when you sell

Take a couple buying a $1.5 million condo with 20% down and a $1.2 million loan at 6.4%, earning $400,000, in the 24% federal bracket, with no other itemized deductions.

• First-year interest is about $76,300; 62.5% is deductible, about $47,700.
• SALT reaches the $40,400 cap (property tax of about $17,700 plus state income tax), and their MAGI is under the phase-down.
• Federal itemized deductions total about $88,100, against a $32,200 standard deduction: $55,900 of extra deductions, worth about $13,400 at 24%.
• California allows interest on $1,000,000 of the debt, about $63,600, plus the full $17,700 of property tax: about $81,300 against an $11,412 standard deduction, or $69,900 of extra deductions, worth about $6,500 at 9.3%.
• Total tax saving: roughly $19,900 a year, or about $1,650 a month, off an all-in payment near $10,000.

That is a meaningful discount, and far less than "the interest is deductible" implies. Change the rate, the bracket, the income or the loan size and the number moves, so run your own version before you compare against rent in rent vs buy in SF.

When you eventually sell, the federal exclusion lets you exclude up to $250,000 of gain ($500,000 on a joint return) if you owned and lived in the home for at least two of the five years before the sale and have not used the exclusion in the prior two years. Your basis includes the purchase price plus most of your closing costs, so keep the closing package. Renting and selling covers the rest, and Prop 13 and Prop 19 covers how your property tax base is set and protected. For a sense of what appreciation you are actually taxing, the comps tool shows recent sales around any SF parcel.