Minnesota State Real Estate Practice Test

What types of costs related to homeownership are deductible for Federal income tax purposes?

1. Utilities, repairs, and homeowner's insurance

2. Mortgage interest, local property taxes, and origination fees

3. Property management fees, maintenance costs, and closing costs

4. Home improvement costs, landscaping, and HOA fees

The correct answer is: Mortgage interest, local property taxes, and origination fees

The correct choice highlights the specific costs associated with homeownership that are deductible when filing Federal income taxes. Mortgage interest is the most significant of these deductions, as homeowners can deduct the interest paid on their mortgage loans, potentially leading to substantial tax savings, especially in the early years of a mortgage when payments are mostly interest. Local property taxes are also deductible, allowing homeowners to reduce their taxable income by the amount they pay in property tax each year. Origination fees, which are upfront fees charged by lenders for processing a new loan, can be considered deductible in the year of the loan or amortized over the life of the mortgage. The other options do not contain costs that are generally deductible for Federal income tax purposes. Utilities, repairs, and homeowner's insurance, while important for home maintenance, do not qualify as deductible expenses. Similarly, property management fees, maintenance costs, and closing costs, although vital for some homeowners and investors, are not typically eligible for deduction under federal tax law. Lastly, home improvement costs and HOA fees do not have deductibility for most homeowners. Home improvements may increase the property's basis for capital gain purposes but are not directly deductible.