Identification

• At tax season, you will receive Form 1098 from your lender to help you deduct real estate expenses. For the prior tax year, Form 1098 summarizes your mortgage interest expenses, alongside any property tax payments made out of your escrow account. As your home loan is paid off, you can expect to pay out less money toward deductible mortgage interest. Property tax expenses, however, are not exactly related to the size of your remaining mortgage principal balance. Local treasury officials calculate your property taxes according to value of your home and municipal budget needs.
  
  

Residential Real Estate

• You will complete Schedule A to write off mortgage interest and property tax expenses for your primary residence and any vacation homes that you own. Other deducible items on Schedule A include state income taxes, charitable donations and work expenses that have not been reimbursed. After completing Schedule A, you will total up your itemized deductions and enter that figure onto Form 1040. The itemized deductions subtract away from your taxable income, upon which your tax bill is ultimately calculated.
  
  

Itemized Deductions versus Standard Deduction

• It is important for you to verify that your itemized deductions exceed your applicable standard deduction, before you write off real estate expenses from paying off a mortgage. As of 2010, you can take a $5,700 and $11,400 standard deduction under a single and married filing jointly status, respectively.
  
  

Investment Property

• For mortgage-related write-offs on investment property, you will complete separate tax forms according to business structure. As a sole proprietor, partner, or S corporation, you will complete Schedule E to document your real estate activity. To calculate real estate income, you will subtract mortgage interest and property tax expenses away from your total real estate rental revenue. From there, you will attach Schedule E to Form 1040 and include real estate income within your taxable income. Alternatively, a corporation that owns real estate will subtract mortgage interest and property tax expenses away from corporate revenue on Form 1120, before calculating a final tax bill on corporate profits.