Tax Help for Homeowners: What's Deductible?

Interest on Your Mortgage

Interest on your mortgage, whether paid to a lender, home seller, or another party, is deductible as long as it's for debt secured by real property. Additionally, interest on a second or home equity loan up to $100,000 is deductible. Property Taxes are also fully deductible, but special government fees like water or sewer assessments may not be. Loan Points are fully deductible for a purchase mortgage in the year you pay them, while in a refinance, you deduct points incrementally over the loan term.

What Isn't Deductible?

Expenses related to Home Improvement, Homeowner and Co-op Dues, and Insurance Expenses are not deductible.

Retirement Savings and Real Estate 

Saving for a down payment is generally more tax-effective than using retirement savings, though tax rules allow first-time buyers to withdraw up to $10,000 penalty-free from a conventional IRA or Roth IRA for a home purchase. For a Roth IRA, contributions are not deductible, and distributions must meet certain conditions, including using the money to buy a first home.

There are limits on contributions to Roth IRAs, typically up to $3,000 a year for single filers with adjusted gross income below $95,000 or joint filers with income below $150,000. Converting existing IRAs to Roth IRAs is also subject to certain rules and limitations.

401(k) PlansParticipants in employer's tax-deferred retirement plans can borrow up to a specified limit from their account penalty-free for a home purchase. Relatives can also draw from their accounts to provide a gift or loan for a home purchase. However, tapping 401(k) funds may affect your eligibility for a loan if you have significant outstanding debt, as lenders consider this when calculating income-to-debt ratios.