One of the treasures of homeownership is that the IRS and most state governments allow you to deduct, within certain limits, mortgage interest and property taxes when you file your annual income tax return. When you file your Federal IRS Form 1040, the mortgage interest and property taxes on your home are itemized deductions.

On mortgage loans now taken out, you may deduct the interest on the first $1,000,000 of debt as well as all of the property taxes. The good folks at the IRS also allow you to deduct the interest costs on a home equity loan (second mortgage) to a maximum of $100,000 borrowed.

Just because mortgage interest and property taxes are allowable deductions on your income tax return does not mean that the government is literally paying for these items for you. Consider that, when you earn a dollar of income and must pay income tax on that dollar, you don't pay the entire dollar back to the government in taxes. The amount of taxes you pay on that dollar is determined by your tax bracket.