For many people, owning a home is the fulfillment of the American dream. As a first-time homebuyer, buying gives you a feeling of starting a new chapter in life, perhaps a feeling of having “arrived.” But make no mistake, owning a home is a huge financial responsibility, probably the biggest you will ever have. Besides the mortgage payments, there is insurance, property taxes, maintenance and repair costs and so on.

The federal government knows just how big a deal owning a home is, so the tax code provides a number of benefits for people who own their own homes. Certain expenses are deductible. Let’s take a look at a few of those deductions.

Mortgage Interest

Your biggest tax break is reflected in the house payment you make each month. For most new homeowners, the bulk of that check goes toward interest, and all that interest is deductible (unless your loan is more than $1 million[1]).

Interest tax breaks do not end with your home’s first mortgage. If you pulled out extra cash through refinancing or took out a home equity loan or line of credit, you may be eligible for a deduction on that debt. Generally, equity debts of $100,000 or less are fully deductible.

Do you own multiple properties? Mortgage interest on a second home is also fully deductible. In fact, your additional property does not have to strictly be a home. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest tax deduction as long as you also spend some time there. Be careful however. If you do not vacation at least fourteen (14) days at your second property, or more than 10% of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and you therefore would not be eligible for interest deduction.

Points

Did you pay points to get a better home loan rate? They too offer a tax break. The only issue is exactly when you get to claim them. The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.

A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan. The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. But if you use the extra cash for something else, such as buying a car, the point deductions must be parceled out over the equity loan’s term.

Points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.

Real Property Taxes

The other major deduction in connection with your home is real property taxes.

A big chunk of most monthly loan payments is the real property taxes, which go into an escrow account for payment once a year. This amount should be included on the annual statement you get from your lender, along with your loan interest information. These taxes will be an annual deduction as long as you own your home.

But if this is your first tax year in your house, dig out the settlement sheet you got at closing to find additional tax payment data. When the property was transferred from the seller to you, the year’s tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.

Due to various tax benefits put in place by the government to encourage consumers to purchase homes, buying a home could be a very wise decision. Ultimately, taking advantage of these tax benefits can save you a great deal of money. Due to the various restrictions and conditions regarding these tax benefits, it is important to consult with one’s financial advisors or accountants to fully understand the benefits and opportunities of tax benefits to those who own homes.

[1] If you’re the proud owner of a multimillion-dollar mortgaged mansion, the IRS will limit your deductible interest.