ABA Family Legal Guide

Buying and Selling a Home

Tax Considerations

Tax Considerations When Buying Your Home

What items involving home ownership are deductible against federal income tax?

Both property tax and interest on loans of up to $1 million in principal are deductible against your taxable income when you file your federal income tax form. Federal law also permits you to borrow up to $100,000 through a home equity loan and deduct the interest, as long as the total debt on the home (including the first mortgage) does not exceed the fair market value of the home. Remember, however, that you must itemize to claim these deductions; they are not available to taxpayers who claim a standard deduction. New buyers may deduct any loan fees or points paid to obtain a mortgage in the tax year in which the points were paid, but only if the points were paid by funds other than the mortgage funds borrowed by the buyer. (A point is equal to 1 percent of the amount borrowed.) Loan fees or points paid to refinance a mortgage cannot be claimed in a single year; they must be spread out over the life of the loan.

Be aware that transfer taxes, lawyer fees, recording charges, and other lender charges, such as for the appraisal and the credit report, are not deductible. See chapter 5, "Home Ownership," for more on possible federal tax breaks.