ABA Family Legal Guide

Home Ownership

The Financial Side of Home Ownership

Tax Considerations

What tax breaks are available to homeowners?

On your federal tax return, both your local property tax and mortgage interest paid on your home loan (up to $1 million) are deductible against other income as long as you itemize and do not use a standard deduction. Deductibility simply means that you don't have to pay federal taxes on the income you spend on mortgage interest and state and local taxes. In the early years of a home loan, for example, when most of your payment goes toward interest, you might shelter as much as a quarter to a third of your income. You can deduct mortgage interest on a vacation home, too, as long as it's not used principally as a rental property.

Federal tax law also allows you to deduct interest paid on up to $100,000 of a home equity loan as long as the total debt on the home (including the first mortgage) does not exceed the fair market value of the home.

You also may be eligible for a deduction of property tax paid on your home on your state income tax return, but this is not the case in all states.