Home contains many ways to save on taxes

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Everyone wants to minimize income tax and keep more of what he makes. One place to look for personal tax savings is as close as your front door. |ret||ret||tab|

Your home is the source of several itemized deductions you can use to reduce your tax bill. These deductions include mortgage interest expense, home equity loans, home-buying fees, gains from selling, an office in the home and second homes.|ret||ret||tab|

You can deduct mortgage interest on the first $1 million of debt incurred to acquire, construct or substantially improve a qualified residence. If the deductibility of your overall itemized deductions is subject to IRS phase-outs (deductions reduced to 3 percent of adjusted gross income of more than $128,950), consider paying off your home mortgage early. |ret||ret||tab|

Paying off the mortgage and then investing that monthly mortgage payment may help you meet financial objectives faster. Also, when refinancing your mortgage, remember that only the amount less than the current outstanding principal balance will qualify as mortgage debt. |ret||ret||tab|

Be smart by consulting your tax and financial adviser before making any drastic mortgage changes. Your adviser can run the numbers and help you decide what makes the most sense.|ret||ret||tab|

Interest on home equity loans is usually deductible. You can use the loan for anything, including paying off other consumer loans that aren't deductible (for example, credit cards and autos). |ret||ret||tab|

You can only deduct interest on a loan for an amount equal to or less than the equity in your home up to a maximum of $100,000. So, some interest paid on 125 percent loans would not be fully deductible.|ret||ret||tab|

When you buy a home, you have two major sets of fees, closing costs and points. Closing costs are generally not deductible, but they add to the basis of the home, which reduces gain when you sell. Points may be deducted in the year they are paid. In some cases, points must be deducted in monthly increments throughout the life of the loan. |ret||ret||tab|

If the seller pays points, the points are also deductible by the buyer. If you purchased a home after 1996 and the seller paid the points, you may want to consider amending your return if you did not deduct them. |ret||ret||tab|

You cannot deduct losses when you sell your home. However, if the home is rental property, you may be able to deduct an annual operating loss. |ret||ret||tab|

You might also take extra deductions by staying in the home but using part of it for business. Whether as rental property or business use, when you sell your home you can claim a business loss if the property declines in value below its current tax basis. Of course, you may also have to pay tax on any gain when you sell your home.|ret||ret||tab|

If you produce a gain when selling your home, you can exclude $500,000 if you're married filing jointly or $250,000 if you file individually. To use this exclusion, the home must have been your principal residence for at least two of the last five years. There are partial exclusions if you have not been in your home for more than two years and you have to move because of a change in employment, health, or unforeseen circumstances. |ret||ret||tab|

The exclusion may be used once every two years and at any age. If you still incur a taxable gain on your home sale, check your records to see if you've overlooked any capital improvement costs, such as constructing additional rooms. These expenses reduce your taxable gain when added to the basis in your home.|ret||ret||tab|

Tax law was recently softened to make qualifying for the home office deduction easier. To qualify for the deduction, you must conduct administrative and management activities from the home office and not anywhere else. Your home office must also be used regularly and exclusively for business. For instance, the office cannot also house the family computer used for games and homework.|ret||ret||tab|

If your home office meets these qualifications, you may deduct a percentage of your homeowner's insurance, home repairs, and utilities equal to the percentage of space in your home the office occupies. Plus, if you own your home, you can depreciate the space designated as your office. If you rent, you can deduct part of your rent. You can also deduct any space in your home that you use for inventory or product sample storage. Before you take the home office deduction, note that the IRS often audits people who use it.|ret||ret||tab|

To qualify for a second-home deduction, your second home must have a place to sleep, a toilet and cooking facilities. This could include a condominium, recreational vehicle or a boat. |ret||ret||tab|

You may also be able to deduct interest on a loan for the second home if your primary and secondary mortgages, including home improvement funds, don't total more than $1 million. If you rent your secondary or primary home for less than 15 days, you don't have to report the income. Other deductions may apply for other rental arrangements.|ret||ret||tab|

There's definitely no place like home when it comes to itemized deductions that can save you tax dollars. Your personal tax and financial adviser can help you determine which ones are the best for your situation.|ret||ret||tab|

|bold_on|(David Myers is a partner with the certified public accounting and business advisory firm of Whitlock, Selim & Keehn, LLP.)|bold_on||ret||ret||tab|

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