Property Taxes

• When you purchase a home, your state tax entity will assess yearly taxes on your property. These taxes pay for government functions, such as road maintenance and construction and public safety. In most cases, you pay your real estate property taxes as part of your monthly mortgage payment -- the lender funds an escrow account with a portion of each payment and pays your property taxes when due. You may deduct all amounts you pay for real estate property taxes.
  
  

Mortgage Interest

• In exchange for lending you money to purchase your home, your mortgage lender charges interest on the unpaid principal of your loan. The interest becomes part of your monthly mortgage payment -- because your principal balance is highest at loan inception, the greatest percentage of your payment will go toward interest during the first years of the loan, and your payments will gradually contribute more toward your principal balance as you continue making payments. The Internal Revenue Service permits you to claim your paid mortgage interest as a tax deduction.
  
  

Private Mortgage Insurance

• If you make a down payment of less than 20 percent of the purchase price of your home, your lender will typically force you to carry private mortgage insurance, which becomes part of your mortgage payment until you have about 20 percent equity in the home. This insurance provides no protection for you -- instead, it financially protects your lender if you default on the mortgage. You may deduct the entire cost of private mortgage insurance on your federal tax return.
  
  

Considerations

• Although some parts of your mortgage payment are deductible on your taxes, other parts are not. You cannot deduct principal paid to reduce your mortgage balance. Also, although private mortgage insurance is tax-deductible, you cannot deduct your homeowners insurance premiums to reduce your tax liability. You cannot deduct your property taxes for the entire year during which you purchase the home. The seller can deduct property taxes applicable from the beginning of the year through the day before the sale, and you can deduct the portion applicable from the date of sale through the end of the year.