What house-related expenses can we write off on our taxes? By Kimberly Lankford, Contributing Editor August 31, 2006 What house-related expenses can we write off on our taxes?You get a ton of tax breaks when you own a home, which makes homeownership a bit more affordable. The biggest is the tax deduction for mortgage interest. You can write off the interest on up to $1 million in debt to buy or substantially improve your first or second home (interest on a mortgage for a third home is not deductible unless it is a business or rental property). The deductible interest can give you big savings at tax time -- especially in the early years of owning the home, when most of your payments go towards interest. If you just took out a $500,000 mortgage and are paying 6.5% interest on a 30-year loan, your monthly payments are $3,160. In the first year, about $2,600 to $2,700 of each payment goes towards interest (the amount decreases slightly each month), while the rest goes towards principal. By the end of the first year, you should have paid $32,335 in interest. If you're in the 28% tax bracket, those interest payments could cut your tax bill by $9,053. Run the numbers through the How Much Will My Home Payments Be? calculator (then click on "tables") to see how much interest you'll be able to write off each year. You can also write off your property taxes annually and the points paid in the year you bought the house -- even if the home seller paid them for you. If you paid two points (each point is 1% of the loan) on a $500,000 loan, you could write off $10,000 in the year you buy the house, which could lower your tax bill by up to $2,800 if you're in the 28% bracket. You can also deduct the points you paid when you refinance, but you must spread that deduction over the life of the loan. So if you refinance to a new 30-year $500,000 loan and pay for two points, you need to spread that $10,000 write-off over the 30-year term of the loan -- letting you deduct $333 per year. If you sell the house before you pay off the loan -- or if you refinance again before paying off the loan -- then you can deduct the remainder in the year that you sell or refinance. Advertisement And you can deduct the interest on up to $100,000 in home-equity debt every year, no matter what you use the money for -- which can give you a low-interest alternative to a car loan or student loan, as long as you make sure that you can afford to continue to make the payments so you don't put your house at risk. You can't deduct closing costs in the year you buy the house, but you can use them to increase your cost basis if you have a tax bill when you sell. You can also use the cost of major home improvements to increase your tax basis when you sell. But the good news is that most people don't owe income taxes on their home-sale profits anymore. As long as you've lived in the house for at least two out of the past five years, you can exclude $250,000 in home-sale profits from your taxes if you're single; $500,000 if married filing jointly. For more information, see our Homeowner's Tax Guide. Got a question? Ask Kim at email@example.com.