Tax Help for Homeowners...What's Deductible?

Interest on your mortgage Whether you pay it to a lender or to a home seller or other party, interest on your mortgage is deductible as long as it's for debt secured by real property. Interest is deductible on a second or home equity loan up to $100,000. Property taxes Your property taxes are completely deductible, but special government fees such as water or sewer assessment may not be. Loan points Points are fully deductible for a purchase mortgage, in the year that you pay them. In a refinance, you write off the points in increments over the term of the loan.

What Isn't Deductible?
  • Home improvement expenses 
  • Homeowner and co-op dues  
  • Insurance expenses 

Retirement Savings and Real Estate Saving for a down payment is the most tax-effective way to buy a home compared to using your retirement savings. But tax rules have been relaxed somewhat to allow cash-strapped first-time buyers to tap these funds without paying the 10 percent penalty on early withdrawals.

IRA Funds
 You can now draw up to $10,000 penalty-free from a conventional individual retirement account or a Roth IRA to buy your first home as long as you purchase your home within 120 days of withdrawing the funds. If you've owned a home before, but not in the past two years, you also qualify to make this withdrawal. You still pay state and federal income tax, however, which can cut that amount significantly. If you are in the 28 percent federal tax bracket, for example, you would net $7,800 on your withdrawal to go toward your home purchase, including the down payment and the closing costs listed above. Add in any state income tax and it would be less.

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