For most home owners their biggest tax deduction is their mortgage interest. At the end of each year your lenders will provide a Form 1098 statement showing the mortgage interest you paid during the year. This is the amount you will deduct on your tax return. There may also be some portion of mortgage interest that appears on your settlement statement in the year you purchased your home. For owners who have private mortgage financing (such as seller financing) this interest in also deductible so long as you report it properly on your taxes. You can also deduct any late payment charges as interest as long as the charge was not for a separate service provided to you by your lender.

If you pay off your home mortgage early and you're required to pay a prepayment penalty, you may deduct that penalty as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan. For more information on mortgage interest, see IRS Publication 936, Home Mortgage Interest Deduction at http://www.irs.gov/publications/p936/index.html

For some people paying points makes good sense when buying a house or they may be standard charges for you lender. If so, these points can usually be deducted as a prepayment of interest. These will show up on you HUD-1 Settlement Statement and are often also called Loan Origination Fees, or Discount Points. You may deduct any points you pay, or points your seller paid on your behalf, in the year in which you pay the points so long as you meet all of these requirements:

1. Your loan is secured by your primary residence
2. Paying points is customary for your area
3. The amount of the points is typical for your area
4. You use the cash method of accounting for expenses (you report income and deduct expenses in the same calendar year)
5. The loan was used to buy, improve, or build your home
6. The points are computed as a percentage of the loan principal
7. The points are clearly delineated on your settlement statement
8. You put cash into your home purchase in an amount at least equal to the points you were charged

Points that do not meet these criteria may still be deductible but you will have to deduct them over the entire life of the loan. These include:

1. Points paid for refinancing which can only be deducted over the life of the new mortgage
2. Points you pay on loans secured by your second home must be deducted over the life of the loan

Be sure to check how your lender is charging you on your HUD-1 Settlement Statement. Points charged for specific services such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. For more details on deducting points, see IRS Topic 504, Home Mortgage Points at http://www.irs.gov/taxtopics/tc504.html.

You can deduct annual taxes based only on the assessed value of your property (this is usually different from the sales or market value). Your mortgage interest statement should list the amount of real-estate taxes you paid if you use an impound account (also called an escrow account) with your lender to cover real-estate taxes and homeowner's insurance in each monthly payment. If you pay taxes yourself then you will need to keep track of the semi-annual or annual tax bills that show the amount you paid during the year. And be sure to record the real estate taxes that you pre-paid on your HUD-1 Settlement Statement at closing as these may not be accounted for otherwise. Only deduct the actual real estate tax payments you made during the year, especially if your impound account statement is not clearly indicating your lender may be making payments in advance.

You can't deduct charges for public services to a property even if the payments are made to the taxing authority in your area. Examples include:

1. A unit fee for the delivery of a service (such as water delivery)
2. A charge for a residential service such as trash collection
3. A flat charge paid for a single service provided to you specifically by your local government
4. Amounts you pay for local benefits that tend to increase the value of your property such as the construction of streets, sidewalks, or water and sewer systems -- but you can deduct whatever you pay for assessments for repairs or maintenance.

For more information on deducting property taxes, see the IRS FAQ on Property Taxes.

A lot of the costs of home ownership are not deductible. Don't get caught trying to claim any of the following expenses as a deduction:

1. Homeowner's insurance premiums
2. Fire insurance premiums
3. FHA mortgage-insurance premiums
4. Principal payments made on your mortgage
5. Title or mortgage insurance
6. Utilities, such as gas, electricity, water, or trash collection
7. Most settlement costs on your closing or settlement statement
8. Homeowner's association dues and fees