Homebuyer Credit

• The federal government offers a tax credit for first-time homebuyers who purchase a home between Jan. 1, 2009 and April 30, 2010, or entered into a contract between May 1 and July 1, 2010. The credit is the smaller of either $8,000 or 10 percent of the home's purchase price. The tax credit is a dollar-for-dollar reduction in the amount of income tax you owe.
  
  

Property Taxes

• Taxpayers can deduct real estate taxes imposed by state and local governments on homes in the jurisdiction. To qualify for the deduction, the tax must be imposed by the local government at a uniform rate on all taxpayers. Additionally, the tax revenue must be used for the general welfare of the community. If the local government imposes a tax on property owners for special projects or purposes, the IRS will disallow the deduction. Any amount you pay to the state or local government for special improvements that add value to the home cannot be taken as a real estate tax deduction.
  
  

Sales Tax

• First-time homebuyers can elect to deduct the sales taxes paid related to the purchase of a home as an itemized deduction in lieu of a deduction for state income taxes. This election is commonly taken by residents of a state, such as Florida and Nevada, who do not impose an income tax on earnings. Sales tax is often paid when you purchase a mobile or prefabricated home, or purchase the materials to construct a new home. Electing to deduct sales taxes does not affect a homeowner's ability to deduct real estate taxes.
  
  

Mortgage Interest

• If you take out a mortgage to finance the purchase of a first home, the annual interest payments can be deducted. To qualify, the mortgage must be secured by the home and provide that, in the event of default, the lender assumes full ownership of the property in full satisfaction of the debt. The deduction is limited to the interest that accrues on up to $1 million in outstanding principal balances. If you purchase a home with a $2 million mortgage, only half of the interest can be deducted. Deductible mortgage interest includes points you pay that are necessary to obtain the mortgage.
  
  

Deduction Limitations

• All home-related expenses are taken as itemized deductions and reported on the Schedule A attachment to Form 1040. You must have sufficient total itemized deductions in a tax year that exceed the prevailing standard deduction amount to benefit. If you are unable to accumulate sufficient deductible expenses, the IRS provides taxpayers with a $500 deduction that can be taken in addition to the standard deduction amount for real estate taxes paid. However, this is the extent of homeowner tax benefits for taxpayers ineligible to itemize.