Milo is filing his federal income tax return. He can deduct

• A. The principal payments on his mortgage
• B. The appraisal fee
• C. The down payment
• D. The interest paid on his mortgage

Answer: (D)

Mortgage interest on a loan secured by your home is deductible if you itemize on your federal return. This deduction lowers your taxable income and is the main way homeowners get a tax break for borrowing to buy a home. The other options don’t qualify as current deductions: principal payments reduce loan balance and build equity, not your taxes; a down payment isn’t deductible; and appraisal fees for obtaining the loan aren’t deductible as a personal expense (though some closing costs can affect the basis of the home). So the only deductible item among these is the interest paid on the mortgage.