Federal Deductions for Homeowners With a Mortgage

Make no mistake -- a mortgage on a home or property is a liability. However, just because you're spending a significant amount of your monthly income on mortgage payments and property taxes doesn't mean that you are without options to save. Indeed, the Federal Government (and most state governments) offers numerous ways to deduct expenses of homeownership.

You can deduct most of the interest you pay on your home mortgage bills. If you have a mortgage on a second or third home, you can similarly deduct the interest completely. If you take a loan to improve your house, buy commercial property, or even secure a home equity line of credit, the Federal Government will allow you to take interest payments as deductions.

Moreover, if you have to pay points on your mortgage, or if you encounter a prepayment penalty on your mortgage, the Feds will similarly allow you to deduct interest payments. Be aware that this doesn't mean that you can deduct the entirety of your mortgage payment -- just the percentage of your payment that relates specifically to interest charges.

In most cases, you can deduct the money you spend on property taxes -- both at the state and the Federal level. The IRS puts out a comprehensive description of potential homeowner deductions -- it's called IRS Publication 530, and it includes numerous ?exotic? stipulations about financing and tax laws. Your accountant or tax advisors can help you craft a smart way to legally take advantage of Federal offers.

Bear in mind that, in most cases, you will not be able to deduct your gas and electric bills, closing costs or realtor fees, or insurance premiums. In addition, if your house depreciates, you likely will not be allowed to deduct the additional costs you incur as a result of that depreciation.

If you run a business out of your home, you may be able to deduct even more. Your home office, home office supplies and furniture, and even utilities for your home office can all be deducted, provided that your ?work at home? environment meets certain standards set forth by the IRS. Make sure you know these rules. They are sometimes counterintuitive. For instance, if you have a couch in your office that doubles as a guest bed, your office may be disqualified from deduction protection.