As a seller:
-->You're entitled to the same deductions (interest, taxes, repairs you pay for) as if you were just renting out the property.
-->The up-front option fee is taxable only when the option is exercised or when the option expires. So an owner might take a $5,000 option fee today, but if it's a 3 year option (and it's not terminated prior to that date), taxes won't be owed for 3 years. (See an accountant for details.)
As a tenant-buyer:
-->You cannot deduct taxes or interest. (You don't own the place, so they're not yours to deduct.)
However, there is a technique involving land trusts that does allow the resident beneficiary (different from, but what you'd think of as the, tenant-buyer) to get the tax write-offs. Again, this is NOT a lease option. What happens, in brief, is this: The seller puts the property into a land trust. Then the person who wants to buy is added to the land trust as a resident beneficiary. So now we have two owners of the land trust--the seller and the buyer. The resident beneficiary rents the property from the land trust (of which he's part owner). So he's a tenant. However--and this is where the possible tax deduction comes in--the resident beneficiary is ALSO a part owner--a beneficiary--of the land trust. As an owner of the trust, he's entitled to the deductions generated by the property in the trust. At some point (per the trust documents) the property is brought out of the trust and the resident beneficiary has the right to purchase the property.
So it accomplishes pretty much the same thing as a lease-option (allows a would-be buyer to live in the property and then, if he chooses, to purchase the property) while also permitting tax deductions. It's also a lot safer for both the seller and the buyer than a lease-option is.
See a lawyer or accountant who's familiar with land trusts. Or see http://www.landtrust.net.
Hope that helps.