Most people can deduct all their mortgage interest from the income that is subject to federal and state taxes. You also can deduct local property taxes. In addition, as long as they have lived in the home at least two of the five years before selling it, a married couple can keep up to $500,000 in capital gains tax-free and singles can keep $250,000 free from tax. Make sure that you have proof of how much money you spend on your mortgages so that you can ensure your qualification for deductions.
There is a drawback, however. If your income is high enough or if you receive enough deductions, then you could trigger the alternative minimum tax, or AMT. Many of the tax breaks disappear once AMT is triggered. Unfortunately, booming house prices have raised property taxes which, in turn, may trigger the AMT which takes away the deduction!
