- You save taxes when you buy it.
- You save taxes while you own it.
- You save taxes when you sell it.

One reason more Americans than ever own homes is because they consider it their ultimate tax shelter.

"The mortgage interest deduction and the deduction for property taxes are to most Americans, sacred. These deductions have been around since time immemorial and the purpose was to encourage home ownership,'' said Leonard W. Williams, a certified public accountant in Sunnyvale, CA.

Mortgage interest deduction

All but the very wealthy home owners deduct all the mortgage interest
( See Figure A) they pay and consider that the primary tax benefit to home ownership.

IRS Publication 936 ''Home Mortgage Interest Deduction'' says, in general, 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. The maximums are halved for married tax payers filing separately.

Watch out for those popular 125 percent equity-loans. Your equity tax deduction is 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.

The mortgage interest deduction, along with other itemized deductions are included on ''Schedule A, Itemized Deductions'' to reduce your taxable income and ultimately your tax bill.

"If that total exceeds 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) then you get it deducted from your adjusted gross income,'' said Peter Vernaci, a certified public accountant from San Jose.

Mortgage tax credit

The Mortgage Credit Certificate (MCC) program 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 yourW-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.

Points

Home buyers also get to fully deduct all points ( See Figure B) associated with a home purchase mortgage. Sometimes called ''origination fees'' ''loan discounts'' and ''broker discounts,'' each point is one percent of the financed amount. In many cases, the buyer can also deduct points on the buyer's mortgage that are paid by the seller.

Points on refinanced mortgages are also deductible, but over time.

''If you refinance, you have to amortize the deduction for points over the life of the loan, but if you refinance again you get to write off the balance of the points from the old refinance,'' said Vernachi.

Taxes

Property taxes, referred to as ''real estate taxes'' in Publication 530, are also deductible from your income. Be careful not to deduct escrow money held for property taxes, but not actually used to pay them, say until the next tax period. Local tax refunds reduce your deduction by a like amount.

Home sales

Even when you sell your home, it continues to be a tax shelter, for a few home owners.

''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.

Thanks to the 1997 Taxpayer Relief Act, however, many home sellers no longer suffer a taxable gain.

That's because, under the act, sellers get to keep, tax free, up to $250,000 in capital gains ($500,000 for married sellers who file taxes jointly) on sales of homes used as a principal residence for two of the prior five years.

"If the gain is less than the $250,000/$500,000 exclusion, then those sales expenses are a kiss-off. They aren't written off against taxable income, hence they don't save any taxes," Williams said.

Published: November 13, 1998

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