Most people cringe at the word taxes. But mention tax benefits and you have a captive audience. Buying a home not only is an equity investment, homeownership can help you save money through tax breaks via certain itemized deductions from your income tax.

Where Deductions Are Taken: To take advantage of homeowner deductions, you must file Form 1040 and itemize your deductions on Schedule A. If you itemize deductions you cannot take a standard deduction. Determine which method is more beneficial by consulting your tax advisor.

What Expenses May be Deductible for Homeowners:

• Interest paid on a home loan: Interest paid on a first mortgage, second mortgage, home improvement loan or a home equity loan is tax deductible (assuming that you are itemizing deductions and not claiming the standard deduction). There are limitations to this, though:
  • First, your deductions are limited to a maximum of two mortgaged residences. This may be a primary residence and one other property (such as a vacation home). Rental and business properties are not considered in this limit of two.
  • Second, the amount of the debt. Your mortgage interest cannot be deducted if your aggregate mortgage balance is more than $1 million, or $500,000 if married and filing separately. For home equity loans, you can deduct interest for loans up to a total of $100,000 (or $50,000, if married and filing separately) for your main home and second home, and your Loan-to-value ratio cannot exceed 100%. Your lender should provide you with the annual form 1098 (the year-end interest statement).
• Real Estate (or property) Taxes: Property taxes are what most homeowners in the US pay to own real estate. These taxes are assessed annually by county or local authorities to help pay for public services. Property taxes on all real estate, assessed by state and local governments as well as school districts, are fully deductible from income taxes.
  • The method for assessing real estate differs depending on your state and municipality, but this rule of thumb is universal: expect to pay 1-3% of the market value of your home in annual property taxes.
• Discount Points: Points paid upfront in exchange for a lower interest rate are generally deductible in the year paid where you have a purchase mortgage in an amount not exceeding $1,000,000 on a principal residence. If the points are paid for a refinancing of a mortgage, the points will be deductible over the life of the loan.

What Can't be Deducted:

• Closing Costs
• Homeowners insurance expenses
• Cost of utilities
• Real estate commissions paid to agents
• Depreciation
• Home inspection, appraisal or loan application fees