Some of the best perks of owning a home are the tax breaks. Know what expenses you can deduct, and understand how new laws affect you. If you're currently renting, consider the tax advantages of homeownership. This may be the time to buy a home. Remember to consult your tax advisor.

1.       Deduct mortgage interest and real estate taxes.

Interest paid on home loans is deductible up to $1 million for a principal residence plus a second home. Property taxes on all real estate are fully deductible.  MORE...

2.       If you bought a home this year, deduct any money paid toward points or origination fees. You cannot deduct closing costs.

Points paid on a new mortgage loan for the purchase or improvement of a principal residence are deductible for the year in which they were paid. MORE...

3.       If you refinanced your mortgage this year or took out a loan to buy a second home or investment property, deduct any points you paid equally over the life of the loan.

Any points paid on a refinanced mortgage or a loan to purchase a second home or income property must be spread over the life of the loan. Some exceptions apply. MORE...

4.       Deduct private mortgage insurance (PMI).

Taxpayers with adjusted gross income of $100,000 or less can fully deduct premiums for private mortgage insurance (PMI). The deduction is allowable only for insurance on loans that were originated after Dec. 31, 2006, and before Jan. 1, 2011. MORE...

5.       If you moved 50 miles or more for a new job, deduct moving expenses.

If you relocated for a new full-time job at least 50 miles away from your previous home, you can deduct the cost of packing, transporting or storing your household goods. MORE...

6.       If you sold your house this year, see if you're subject to a capital gains tax.

If the profit you received from the sale of your house is under $500,000 for married couples or $250,000 for single owners, you are exempt from the capital gains tax. MORE...

7.       Home improvements and mortgage closing costs are not tax deductible. But, when you sell your house, they can be used to offset your capital gains tax burden, should you have one.

Keep all receipts of permanent home improvements and mortgage closing costs so they can be figured into the adjusted cost basis of your home when you go to sell. MORE...

8.       If you did a short sale this year, the debt forgiven by your lender can be excluded from your taxable income.

Thanks to a new law, you can exclude debt up to $2 million if it was discharged by the lender in 2007, 2008 or 2009. MORE...

9.       Take advantage of energy efficiency tax credits.

Going green is good for the environment and your wallet. You can qualify for a tax credit with documentation of energy efficient updates to your home. MORE...

10.   If your home was damaged from a sudden, unexpected event, such as a natural disaster, fire, vandalism, or theft, deduct some of the loss.

You may deduct all expenses not covered by your homeowner's insurance, minus a $100 deductible and 10 percent of your adjusted gross income. MORE...

Homeowners: Mortgage Interest, Real Estate Taxes Are Deductible

Which season is the best time to be a homeowner? Tax season! Along with the freedom to paint and remodel, tax breaks are one of the many perks of homeownership.

The bad news? Unless you choose to take the standard deduction, your days of "EZ" tax returns are over. You'll need to pick up the 1040 long form and itemize your deductions on Schedule A. Get IRS forms here.

Most state and local governments charge property taxes, which are an annual tax on the value of your property. You can deduct all of the real estate taxes that you pay.

There is some good news about those monthly mortgage bills: A part of the soul-crushing sum can be deducted on your tax return. For most homeowners, the bulk of each payment goes towards interest. That interest is tax deductible, up to a total of $1 million ($500,000 if you are married filing separately) on loans taken out to buy, build or substantially improve a principal residence and a second home. Any type of home is eligible: a mobile home, house, condo or even a houseboat.

In order to deduct mortgage interest on your second home, you must stay there at least 14 days a year or more than 10 percent of the days it is rented during a year. If you don't meet this requirement, it is considered a rental property rather than a second home.

Also, other rules apply if you rent out space in your primary residence.

"Talk to a tax professional. You have to report the income because that is business use of the home as well as residential," explains Alison Flores, a research analyst at the H&R Block Tax Institute.

You can also deduct interest on home equity loans of less than $100,000 ($50,000 if single or married filing separately), as long as the first and second mortgages total less than the value of your home.

EXAMPLE: You take out a $40,000 home equity loan to pay for your son's college tuition. Your home is worth $100,000, and you owe $70,000. You can deduct the interest on $30,000 dollars of the loan, but you're on your own for the remaining $10,000.

If you deduct enough mortgage interest to get a tax refund, you'll need to claim that money as income in the year you receive it.

Always consult your tax advisor. For more information, read IRS Publication 936.

Tax Deductions for First-Year Home Owners

Deduct money paid towards mortgage points or origination fees

Congratulations -- you're a homeowner! Now that you've moved into your new digs, you'll need to:

·         Decide what color to paint the living room

·         Sort through those last few boxes (eventually)

·         Learn about tax deductions for new homeowners

Even before you sign on the dotted line, you can get a mortgage credit certificate (MCC), which is intended to help lower-income buyers afford homeownership.

If you qualify, you can claim the credit each year to cover part of your home's interest. The only catch: You must get an MCC before you get a mortgage and buy a home. Contact your state or local housing finance agency for more information.

You're eligible for a host of tax deductions the minute you get the keys to your front door. Like all homeowners, you can subtract real estate taxes and mortgage interest from your tax tab. Even if you bought a home in December, it's worth getting a few dollars off your IRS bill.

The year you buy your home, you can also deduct any money paid towards mortgage points. The term "points" refers to charges paid by a borrower to get a mortgage, and can also be called loan discounts, discount points, origination fees or maximum loan charges.

You must meet these criteria to qualify: <UL

·         You are buying (not refinancing) a primary residence. Your loan must be secured by the home you live in most of the time.

·         Your overall cash paid at closing exceeds the points charged. This can include money from you, or points paid by the seller. You can't deduct points you paid for with borrowed funds from a lender or mortgage broker.

·         You're not using the points to avoid traditional closing costs. If you paid points in lieu of closing costs, like title insurance and attorney's fees, you can't get a tax credit.

If you meet that criteria, the amount on your settlement statement that's listed as "points charged for the mortgage" can be deducted from your taxes.

Always consult your tax advisor. For more information about home mortgage points, visit the IRS Web site.

How to Deduct Points from a Refinanced Mortgage or Loan for a Second Home

If you refinanced your mortgage, the points you paid are not deductible in the year you paid them, unlike the points you paid when you first took out your mortgage. For refinanced mortgages, you have to deduct the points equally over the life of the loan. This also goes for loans you take out to buy a second home or investment property.

HERE'S HOW: Divide the points paid by the number of payments to be made over the life of the loan. EXAMPLE: If you paid $2,000 in points and will make 360 payments on a 30-year mortgage, you can deduct $66.72 [($2,000/360) x 12] each year, assuming you make 12 mortgage payments in a year.

There is an exception: If you use part of the money for home improvements, you can deduct the portion of points related to the improvements in the year you paid them.

EXAMPLE: If you refinanced your $200,000 mortgage with a new 30-year loan of $250,000, paid $2,000 in points and used the extra $50,000 to make home improvements, you can deduct 20 percent or $400 [($50,000/250,000) x 2,000] of points in the year they were paid. The remaining points paid must be deducted equally over 360 monthly payments or $53.28 [($1,600/360) x 12] each year.

NOTE: If your mortgage ends early because you paid it off, refinanced it with another lender or sold the home, you can deduct any remaining points for the mortgage in that year. So, in the above example, if you sold the house the following year, you can deduct $1,546.72 ($1,600-$53.28).

Always consult your tax adviser. For more information, read IRS Publication 936.

Paying PMI? Deduct It from Your Taxes

Buyers who can't put a 20 percent down payment on their home loan usually get stuck paying costly private mortgage insurance (PMI), which protects lenders if the buyer can't repay the loan.

But if you got a home loan after December 31, 2006, you're eligible to deduct your PMI premium from your taxes. According to the Tax Relief and Health Care Act of 2006, any PMI payments -- often $100 dollars or more per month -- can be deducted as mortgage interest when filling out Schedule A on the federal tax return.

In order to qualify for the full credit, your adjusted gross income (AGI) cannot exceed $100,000 ($50,000 dollars if married filing separately). The deduction is reduced by 10 percent for every $1,000 dollars of AGI you make over the limit, and disappears altogether at $109,000 ($54,500 if married filing separately). If you are paying a premium for mortgage insurance provided by the Veteran's Administration, Federal Housing Administration or the Rural Housing Administration, it is also deductible.

If you paid PMI premiums in a lump sum when you got your mortgage, you can deduct the portion of the sum you use each year on your tax return. You cannot deduct the entire amount in the first year of your loan.

Unless it is extended, the deduction is available for any mortgages that are originated before January 11, 2011.

Always consult your tax adviser. For more information about deducting mortgage insurance premiums, go to the IRS Web site.

Moving Expenses: What's Tax Deductible?

If you move more than 50 miles for a new job, deduct your relocation costs

Moving, in short, isn't fun. Whether you pack and move your own stuff or pay someone else to do it, it takes time, energy and lots of money. Lucky for you, some of those expenses could be tax-deductible.

TO QUALIFY FOR RELOCATION DEDUCTIONS:

You must start a job within a year of your move. It is not necessary that you arrange to work before heading to a new locale.

Your employer cannot reimburse you for the expenses. If your employer does reimburse your expenses, you must claim the money as income on that year's tax return.

You must pass the "distance test." Your new job or business must be 50 miles further than your old job was from your previous home. If you don't have a previous workplace, your new job must be 50 miles from your former residence. If you move less than 50 miles, you must prove that your move was necessary for work or that a closer home is saving you time or money to get the deduction.

You must also pass the "time test." Once you relocate, you must work full-time for at least 39 weeks during the 12 months after you move. Self-employed workers have to meet the first criteria, plus they must work full-time for a total of 78 weeks in the first 24 months. If you moved in 2007 but did not meet the "time test" until after the tax deadline, you can still deduct the moving expenses. You can also file an amended return in 2008 after you've met the time limit.

THE BENEFITS

If you're eligible, you can start deducting expenses as soon as your belongings are on their way to a new town. You'll figure your moving expenses on Form 3903.

WHAT YOU CAN DEDUCT:

Travel by car. If you (or a member of your household) drive to your new digs, you can deduct the cost of gas and oil -- provided that you keep and document your receipts. You can also deduct the standard mileage rate of 20 cents per mile.

Packing and moving belongings. You can deduct the cost of packing, crating and moving your stuff from your former home to your new home. You can also deduct the cost of shipping pets or cars.

Storage costs. Once you move from your former home, any storage costs for the next 30 days are deductible.

Lodging expenses. You can start deducting expenses for lodging the day your furniture is removed from your old house. If your family does not travel together, you can deduct expenses for one trip per person.

WHAT YOU CANNOT DEDUCT:

Food expenses. All the snacks, drinks and meals bought on your trip come from you own pocket.

Moving costs for new furniture. If you buy furniture on the way to your new home, you cannot deduct the price of moving it. You also can't deduct the cost of the furniture -- no matter how good of a deal you get.

Detours or sightseeing on the way to your new home. You're on your own if you deviate from the most direct route to your new place.

Costs associated with buying or selling homes. This includes closing costs, mortgage fees and improvements to help sell your old home.

Trips other than the actual move. Costs from pre-move house-hunting trips or returns to your old haunt are not deductible.

Always consult your tax advisor. For more information about moving expenses, read IRS Publication 521.

Sellers Could Be Exempt from Capital Gains Tax

Up to $500,000 in profits from the sale of your home could be tax-free

If you sell your home this year and profit big, you could be exempt from capital gains tax.

Married couples filing jointly can claim up to $500,000 dollars in profit tax-free, while single sellers or married couples filing separately can profit $250,000 without being taxed. A new provision for 2008: If you're married but your spouse dies, you can get a full $500,000 of gains tax-free if you sell in the year following your partner's death.

To qualify, you must have owned your home for at least five years and lived in the home for at least two of those five years.

For active duty military, exceptions apply. If you are deployed away from your primary residence, you can suspend the period of residence for an additional five years. That means military members only have to live in a home for two of the last 10 years to qualify for the tax benefits.

If you sell your second home, you only get the tax advantages if you've lived in it for two of the last five years. That is, unless you sell the home because of a change in health, place of employment or other "unforeseen circumstance." The maximum exclusion will be reduced in the third instance.

How Much Profit Did I Make?

You know you're eligible. Now, get ready to figure out how much money you made from the sale of your home. You'll need to know the selling price, the amount realized and the adjusted basis.

Selling price refers to the total amount you receive for the sale of your home. That means money -- and also mortgages or other debts that the seller assumes.

The amount realized is the selling price minus selling expenses -- commissions, legal and advertising fees, and mortgage points.

Adjusted basis means increases or decreases you have made to the value of your home. The "basis" is the cost of the home when you first purchased or built it. That includes what you paid for the property, as well as closing costs and settlement fees.

Your home's basis increases when you add home improvements that have a life of more than one year. Repairs and upkeep are not considered improvements. Decreases to your basis include depreciation, insurance payments you received for damages to your home and any home-related tax credits. For more information, see IRS Publication 523.

The amount realized minus the adjusted basis is the gain or loss on your home. If you gain more than the tax-deductible amount, you may be able to further reduce your taxable profit by submitting home improvement receipts with your taxes. Sorry, if you sell at a loss, you can't deduct the difference. But if you did a short sale and your lender forgave any mortgage debt, you can exclude that amount as income.

Always consult your tax advisor. For more information, visit the IRS Web site.

Remodel Your Way to Tax Deductions

Make sure to do value-enhancing projects, and hold on to those receipts

You know that kitchen remodel you just had to have? Sure, it will impress buyers when you decide to sell, but it could also cut your capital gains tax burden.

If you have lived in your current home for two of the last five years, you're eligible for tax deductions when you sell. You can get up to $500,000 of your profit tax-free ($250,000 if single or married filing separately). But if you do a remodel that adds value to your home, the remodeling cost can be deducted from your capital gains.

Let's say you are single, and you bought your current home for $200,000. You do a $50,000 kitchen remodel, and then sell your home for $300,000. You have only lived in the home for one year, so you're not eligible to get your profit tax-free.

"You can report that you gained only $50,000 on the home, and you'll only have to pay taxes on that amount," explains Alison Flores, a research analyst at the H&R Block Tax Institute.

So how can you claim these benefits? Here are some tips:

Only do remodels that add value to your home. "If you paint your living room three times because you can't decide on the color, the cost of the paint is not deductible," cautions Flores. Additions, landscaping, heating and air conditioning, plumbing and insulation -- when done right -- generally add value. For a list of deductible home improvements, see IRS Publication 523. Or, read about 10 ways to boost your home's value.

Document all your expenses. No one from the IRS is going to come over to admire your finished basement, so keep your receipts. You can only deduct expenses for which you have a record. Your improvements affect the home's adjusted basis, so make sure you keep the records on hand for at least three years after you sell.

Always consult your tax adviser. For more information, visit the IRS Web site.

Forgiven Mortgage Debt Can Be Excluded From Taxable Income

A new law affects up to $2 million forgiven by the lender in 2007, 2008 or 2009

Forgiveness of debt means a bank or lender forgoes repayment of principal and/or interest that a borrower owes. Forgiven or discharged debt is typically considered ordinary income that is taxable.

But a new law, the Mortgage Forgiveness Debt Relief Act of 2007, now gives qualified taxpayers a three-year window to exclude discharged mortgage debt from their taxable income. In other words, if you find yourself doing a short sale on your principal residence, you are entitled to a reprieve from the tax liability.

To qualify:

·         The debt must be discharged between January 1, 2007, and January 1, 2010.

·         The amount of debt that can be excluded is limited to $2 million.

·         The debt canceled must be a loan that was used to acquire, construct or substantially improve a property.

·         The property must be the borrower's principal residence under the tax code, meaning the borrower must have lived in the home for at least two of the previous five years.

·         Forgiveness of debt on vacation homes, second homes and investment property does not qualify.

EXAMPLE: If you bought a principal residence for $450,000 with a $400,000 loan and you sold the home in a short sale for $300,000, the lender discharged $100,000 in debt. You can exclude that amount.

NOTE: For debt forgiven on a cash-out refinance or home equity loan, only the amount borrowed to build, buy or improve the home can be excluded. Any money used for other purposes such as vacations, tuition or paying off credit card debt does not qualify.

Lenders are required to report forgiveness of debt to the Internal Revenue Service. Consult your tax advisor for more information.

Go Green to Save Green

Energy efficiency tax credits will boost your conscience and bank account

Ever thought about going green in your home? No, I'm not talking about painting the kitchen -- I'm talking eco-friendly updates. Going green will cut down your energy bills in the long run, and you can get a tax credit for energy-efficient home improvements right now.

Several big-ticket energy savers are eligible for the credit. To qualify, the product must meet or exceed the requirements of the 2000 International Energy Conservation Code.

While you won't get all your money back, you can get tax credits if you buy these products:

·         $50 for purchasing an air-circulating fan

·         $150 for installing a highly efficient furnace or boiler

·         $200 for installing energy efficient windows

·         $300 for purchasing a highly efficient central air conditioner, heat pump or water heater

·         $150 for each qualified natural gas, propane, or oil furnace or hot water boiler

The total credit for each year cannot exceed $500, and no more than $200 can be used towards windows.

In addition, you can receive these larger credits:

·         30 percent, or up to $2,000, for the purchase of solar water-heating equipment or solar panels. You cannot use this credit if you use either product to heat a swimming pool or hot tub.

·         30 percent, or up to $1,000 per kilowatt, for the purchase of a fuel-cell power plant. The plant must generate at least 0.5 kilowatts of power.

How do I qualify?

For existing homes, 2007 was the last year to claim the credit. That means if you did not install the energy-efficient update before January 1, 2008, you're stuck footing the whole bill. You cannot claim improvements made in 2006 on your 2007 taxes.

If you're buying or building a brand new home, you can get the credit for purchases you make before January 1, 2009. However, the credits for energy-efficient windows, doors, insulation, roofs, heating and air conditioning, or nonsolar water heating were for existing homes only. If the home you're building is your principal residence, you qualify for the fuel cells credit. The credits for solar water heaters and solar panels can be used for a principal residence, rental unit or a second home.

Always consult your tax adviser. Read more about the energy efficiency tax credit on the IRS Web site.

Note: If you claim the energy efficiency tax credit because you made green home improvements, you'll need to subtract the money from the basis of your home when you sell.

Get Tax Relief after a Natural Disaster, Theft

Here's what homeowners need to know to start over when damage occurs

It can be tough to pick up the pieces after you lose your home or property. Luckily, there are tax benefits that can help you get back on your feet after a casualty or theft.

A casualty occurs when your home is lost or damaged in a natural disaster or a sudden, unusual event. Losses caused by the following events are covered:

·         Car accident (if not caused by your negligence)

·         Storms and aftermath (including hurricanes, tornadoes, flooding)

·         Fires (as long as the fire is not arson)

·         Mine cave-ins or shipwrecks

·         Terrorist attacks

·         Volcanic eruptions

·         Vandalism

A theft is when someone steals your property and includes:

·         Blackmail

·         Burglary

·         Embezzlement

·         Extortion

·         Kidnapping for ransom

·         Larceny

·         Robbery

To claim tax relief after a casualty or theft, you must provide proof of loss. You must prove that your property was damaged from disaster or theft, and that you were the owner of the damaged assets. The IRS also needs to know whether you've filed an insurance claim to recover or repair your property, and whether you can reasonably expect your property to be found or fixed.

Now, figure the amount of your loss. Remember to consider the value of what was stolen or damaged rather than the replacement cost.

You can deduct any cost not covered by your homeowners' insurance, minus 10 percent of your income and a $100 deductible. You must report casualty losses in the year they happen.

Reimbursements from your insurance for losses aren't taxable, unless you come out ahead. If you get more money than the value of the property lost, report that as income on that year's taxes. If your home is in a presidentially declared disaster area, you can wait to report the gain if you spend the extra money to fix or replace your home.

DISASTER AREA LOSSES

Homes in presidentially declared disaster areas also get tax benefits in the following situations:

Homemade unsafe by disaster. If the state or local government orders you to tear down your home, you can treat the loss in value as a casualty loss.

Tax-free land profits. If your home was completely destroyed by the Katrina, Rita or Wilma hurricanes, any profit you make from the sale of vacant land is tax deductible. A new law for 2007 gives you three years after the disasters to sell the land and claim the tax benefits. Sorry, if you have to sell your land at a loss, you can't deduct it on your return.

Federal disaster relief grants. If you get post-disaster relief grants, do not count them in your income if the payments are made to help you meet necessary expenses.

Federal loans canceled. The Robert T. Stafford Disaster Relief and Emergency Assistance Act may cancel your federal disaster loan. If your loan is canceled, you must reduce your casualty loss by that amount.

Postponed tax deadlines. The IRS may postpone tax deadlines for up to a year.

Always consult your tax adviser. Read more about casualty and theft loss in IRS Publication 547.