A home of your own is the American dream. It's also a great benefit when you figure your federal income tax. A home provides the largest deductions from income for taxes for most homeowners. You'll have to file a long Form 1040 and itemize your deductions, which is more complicated than the simple EZ filing, but you'll generally save a lot of money for that effort.
The biggest home ownership tax deduction is mortgage interest. You can deduct all the interest you pay on your home loan, up to $1 million in debt. You also can deduct interest on a second mortgage or home equity loan or line of credit, with a limit of $100,000. You don't even have to use that money for your home but can use it to buy a car or boat and still claim the interest deduction.
You also can deduct any discount or loan origination points that you paid when you took out your mortgage, so long as paying points is standard real estate practice in your area. You deduct those in the year you paid them on a new loan. You can deduct points if you refinanced your mortgage, too, but have to spread those deductions out over the life of the loan.
Another major deduction is property taxes. You can deduct the full amount of state or local real estate taxes. You deduct the actual amount paid each year in taxes, not the amount you pay into a mortgage escrow account for taxes. You can, however, deduct real estate taxes you paid at closing of a new mortgage. You will get a statement from a local tax office, and your mortgage company also should give you a yearly accounting showing tax actually paid.
You can continue to deduct interest and property taxes on your home even if it is damaged or destroyed by an unexpected event such as a fire or storm as long as you plan to rebuild or repair it and occupy it again. You also can claim a deduction for damage above 10 percent of your adjusted gross income which is not covered by insurance. You have to reduce that amount by $100 and complete a lot of paperwork showing the value of the home and extent of damage.
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