When you buy a principal residence, you are entitled to deduct certain settlement and financing expenses from your federal income tax. To claim these deductions you will need to complete Schedule A: Itemized Deductions.

Current federal tax law allows you to deduct the cost of discount points

you paid (or the seller paid on your behalf). A discount point is equal to 1% of your loan amount and can be found on your HUD-1 settlement statement. The first discount point is often labeled an origination fee by your lender but is still considered deductible under IRS rules. You likely also will have paid deductible recording or transfer taxes (essentially a sales tax on your home and/or mortgage loan).

Prepaid expenses may or may not be deductible in the year of your purchase. Prepaid interest is deductible because it accrues in the same tax year. Real estate taxes that you paid into an escrow account are deductible only to the extent the taxes are due and payable in the year you purchased. Consult with your tax advisor to confirm what are deductible expenses and whether filing a Schedule A is smart for you to do.

For a free consultation to discuss which type of mortgage loan will work best for you, call Victoria Spannaus at Wachovia Mortgage Corp. at (800) 741-7813 or 910-692-6225.