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Home Mortgage Tax Shelter

By Broderick Perkins

"Your home is your first tax shelter. If you live in an apartment and you move out, you've got nothing. If you own your home you deduct your mortgage interest and you've sheltered some of your money," said Peter Vernaci, a certified public accountant in San Jose, CA.
Federal tax deductions designed to promote home ownership save you taxes when you buy, while you own and when you sell your home.
Buying Your Home
The primary tax benefit of home ownership is the mortgage interest deduction. Most homeowners deduct all they pay.
Joint tax filers can deduct all the interest on a maximum of $1 million in mortgage debts secured by a first and second home, plus the interest paid on a maximum $100,000 in home equity loans, according to IRS Publication 936 ''Home Mortgage Interest Deduction.'' The maximums are halved for married tax payers filing separately.
The equity loan tax deduction is actually limited to the lesser of the $100,000 maximum and the home's fair market value, determined by a complicated formula found in Publication 936, so watch out for those popular 125 percent equity-loans.
Mortgage interest, along with other itemized deductions, is included on ''Schedule A, Itemized Deductions.'' It reduces your taxable income, and as such, your tax bill.
Your total itemized deductions, however, must exceed the standard deduction: $3,550 for married couples filing separately, $4,250 for singles, $6,250 for heads of household and $7,100 for married couples filing joint returns.
Home buyers also get to fully deduct points associated with a home purchase mortgage.
"The points cannot be a broker's commission. If the buyer is borrowing money from a financial institution, the points likely will be deductible. If the buyer is borrowing money from a loan or mortgage broker, the points could be the broker's fee or commission, which is not deductible," said Marie Sternberger, an enrolled agent in San Jose, CA.
Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Home owners who refinance can immediately write off the balance of the old points and begin to amortize the new.
"In effect, the loan is gone, but you paid the points anyway," said Vernachi.
Owning Your Home
Property taxes, referred to as ''real estate taxes'' in IRS Publication 530, are also deductible from your income. Don't deduct escrow money held for property taxes, but not actually used to pay them until the next tax period. Any local tax refund reduces your deduction by a like amount.
Selling Your Home
''The brokers commission, title insurance, any of the legal fees, administrative costs, inspection fees. Those are selling costs, and as expenses of the sale, they are deductible from the gain,'' said Vernaci.
Your gain is your home's selling price, minus deductible closing costs, minus your basis. Publication 530 also offers a worksheet to help you figure your basis -- the original purchase price, plus capital improvements, minus any depreciation.
Many home sellers no longer suffer a taxable gain, thanks to the Taxpayer Relief Act of 1997.
Sellers get to keep, tax free, up to $500,000 ($250,000 for single taxpayers, or married taxpayers who file separately) in profit on sales of homes used as a principal residence for two of the prior five years.
"The downside is that for couples selling homes which have greatly appreciated in value, any gain over $500,000 is still subject to tax-no matter what is rolled over," said Martin Nissenbaum, Ernst & Young's director of Personal Income Tax Planning.
SIDE BAR Home ownership yields two often overlooked tax breaks.
Mortgage Tax Credit
The Mortgage Credit Certificate (MCC) program also allows some first time home buyers to benefit from a mortgage interest tax credit.
An MCC, which you first must obtain from your local housing department before you get a mortgage, gives a qualified first-time home buyer a federal income tax credit of up to 20 percent each year the buyer keeps the same loan and lives in the same house.
As explained in IRS Publication 530, ''Tax Information for First-Time Homeowners,'' the credit is subtracted, dollar for dollar, from the income tax owed. For example, if you paid $10,000 in interest, your tax credit would be $2,000. The remaining 80 percent of the interest -- $8,000 is taken as a typical mortgage interest deduction.
You can see the tax credit's benefit immediately in your paycheck by adjusting your W-4 exemption status to reflect the credit. In some cases lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a bigger loan.
Moving Costs
Even some job-related moving costs are deductible provided the new job is at least 50 miles from the old and you work full time at the new work place for 39 of the 52 weeks following the move.
Deductions include travel or transportation costs and expenses for lodging and storing your household goods.
"Self-employed homeowners must work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location," said Marie Sternberger, an enrolled agent in San Jose, CA.
BOX: The Internal Revenue Service's Forms and Publications page offers a search engine for forms, publications, instructions and worksheets home sellers, buyers and owners need.

Broderick Perkins, has been a consumer journalist for 20 years. Experienced in print, electronic, and consulting journalism, he is chief executive editor of San Jose, CA-based, DeadlineNews.Com, an editorial content and consulting firm.

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