10 ways to cash in on your home

Homeownership carries lots of responsibilities and occasional expenses. But at tax time, owning almost always trumps renting.

That's because Uncle Sam lets homeowners take a laundry list of deductions or exemptions on everything from mortgage interest and capital gains on a sale to maintaining a home office or even renting out a second property.

Aside from deductions, home ownership may allow for tax credits and other benefits, too.

Here's a look at deductions available to many homeowners. Some apply for 2006; others you can prepare for in advance of taxes filed for 2007.

Not all deductions will be available to all homeowners, and some might work only for homeowners who itemize their tax deductions.

But it never hurts to run through the options with your tax preparer or the Internal Revenue Service www.irs.gov; 1-800-829-1040.

1: Home-loan interest

You can deduct the interest portion of your mortgage payments each year. According to the National Association of Realtors, only about one-third of all taxpayers itemize (i.e., catalog) their deductions on their returns; of those who do, at least 60 percent deduct mortgage interest.

For some homebuyers, the increased costs of owning versus renting are often offset by this significant deduction, which has been available since 1913.

It applies to the interest from both your primary mortgage and any second mortgage you may have on a property, such as a home-equity or home-improvement loan.

2: Points on a loan

Points amount to 1 percent of a loan's principal, and lenders may charge points as part of your loan. You can deduct points on the purchase of a home but not points related to a mortgage broker's fees.

Deductions for points can take place when you purchase a home or refinance a home loan.

3: Property tax

Local and state-level property taxes get a full deduction. However, if you are disabled, elderly or own a property eligible for listing on a local or national registry of historic places (see related story), you may be eligible for property-tax exemptions or reductions in the total amount of property tax owed.

4: Capital gains

Single homeowners need not pay taxes on the first $250,000 of profit, or capital gains, on the sale of their home. For married homeowners, the figure is $500,000.

To take this exemption, you need to have lived in the property for at least two of the past five years.

For more information, see IRS Publication 523, available online at http://www.irs.gov/publications/p523/index.html.

5: Home office

Homeowners can deduct a percentage of their home's costs proportionate to the percentage of the home used as an office.

If you use 10 percent of your home to keep an office or to run a home-based business, you can deduct, for instance, 10 percent of electrical bills. You can also deduct for repairs, renovations, furnishings or other expenses related to the home-office space.

The deduction has a reputation as a red flag for auditors, but that's not been proved. To make sure you're using it correctly, keep in mind the IRS expects you to create a dedicated space as a home office.

In other words, that desk in the corner of the family room is not necessarily a home office, but a spare bedroom used specifically for an office counts.

For more information, see IRS Publication www.irs.gov/pub/irs-pdf/p587.pdf

6: Home-sale expenses

Sellers can lower capital-gains taxes by deducting agents' commissions, legal costs, title fees, marketing and inspection fees.

You may also deduct repairs and renovations completed up to 90 days before you list the home for sale, if those repairs were done to make the home more marketable.

7: Energy-related tax credits

Homeowners who upgrade their properties with energy-efficient heating or cooling systems, windows, doors, insulation and other systems designed to reduce energy waste may be eligible for tax credits.

Those who use solar energy or other alternative energy systems may also be eligible for breaks.

According to Energy Star, an organization promoting energy efficiency, the maximum tax credit for all improvements is $500 during the two-year period of the credit, which applies to property improvements made between Jan. 1, 2006, and Dec. 31, 2007.

For more information, see Energy Star:

8: Moving costs

Buyers and sellers moving at least 50 miles from their last address and who move within one year of starting a new job may deduct moving costs, storage costs or moving-related travel costs such as lodging and food.

To qualify, you must prove you've worked at least 39 of 52 weeks at your new job once the move is complete.

9: Mortgage tax credits

For lower-income buyers planning to get into their first home this year, now's the time to investigate whether you're eligible for a federal tax credit for up to 20 percent of mortgage interest paid on the home when you file 2007 taxes.

This state program requires that buyers secure a mortgage-credit certificate.

The certificate program has rules about minimum and maximum household income, prices of homes purchased and locations of the homes.

However, many of these restrictions are shifting, especially with respect to the location, says Dee Taylor, director of the Washington State Finance Commission.

"We're relaunching this," Taylor says. "This is an incredibly powerful tool."

Here's how it works: Buyers who expect to pay $6,000 in mortgage interest during a year of ownership would, under the program, qualify for a federal $1,200 tax credit (20 percent of the mortgage interest total) and pay only $4,800 in mortgage interest.

The $4,800 in mortgage interest paid would still be deductible, Taylor says.

"Under this program you don't make more money, but you keep more disposable income," Taylor says.

Buyers hoping to qualify for mortgage-credit certificates must seek them out before closing on their home loan.

To date, lenders originating loans that carry the credit include Countrywide Home Loans, Eagle Home Mortgage, First Mutual Bank, HomeStreet Bank, National City Mortgage and Seattle Metropolitan Credit Union. For more information, check: www.wshfc.org/buyers/MCCprogram.htm

10: Vacation/second home

If you own a second home, you are eligible for many of the same tax breaks that apply to a primary home — deductions for mortgage interest and property taxes, capital-gains exemptions, etc.

That's because the IRS allows the above-listed deductions on one primary home plus one second home.

What that second home means to you, however, determines the extent of the deductions you're allowed to take.

If you rent the second home out, you will need to decide whether you are, for tax purposes, treating the place as investment property (renters spend more time in it than you) or as a personal retreat (you spend more time in it than renters).

Deductions will differ depending on your decision.

The IRS has a "14-day test" to help you determine how to classify your property.

If you use the home fewer than 14 days a year, or less than 10 percent of the days it's rented to outsiders each year, whichever is greater, your home is an investment property.

If you use the home 15 or more days a year, or more than 10 percent of the time you rent it out, it's a "second home."

Your "workdays" on the property (i.e., days spent doing maintenance) don't count toward the 14-day test.

If your property counts as a second home, you can collect 14 days of rent without paying taxes on that income, as well as many of the same deductions you get on your primary home.

If your property counts as an investment property, your returns may become more complex.

This means the home has taxable income (from renters), as well as operating costs (maintenance, advertising, management-firm fees, etc.), depreciation and a total profit or loss each year.

You can reflect this on your taxes in the form of deductions.

If you historically used the home one way (say, as a vacation retreat) and are shifting use (say, renting that vacation place out all season), talk to a tax professional about how to document the shift on your tax forms and with deductions.

The book "How to Rent by Owner" by Christine Hrib Karpinski offers many tax and other financial tips for vacation-home owners.

The Web site is: www.howtorentbyowner.com.