Our Own Homes are the Mother of all Tax Shelters´┐Ż

When it comes to tax shelters, there's no better or safer place than our own homes. There are a vast number of companies out there spending a lot of money on advertising trying to convince us that we should be sending our hard earned dollars to some island in the sun, where (for a nice fat fee of course) they will keep our money safe and out of the hands of the IRS.

Most of these programs, for lack of a better word, are illegal or at the very best not as tax efficient as the claims they make. Uncle Sam allows us to use our homes as a means of collecting a large number of tax deductions, credits and benefits. These were designed and assigned to law to help us offset the cost of owning our own homes. After all, homeowners are the cornerstone of any good economy. We buy consumable goods and services which create jobs and supplies much needed dollars in both local and state taxes. These taxable deductions also keep the housing market fueled with new buyers which in turn helps keep the value of our homes going up. It really is only a matter of very simple math. As the demand for more and more homes increase, the supply gets smaller, (they don't make land anymore) - then the market price can only go one way, up. This creates real wealth for future generations of our families. For most of us, that is the "Great American Dream" - owning our own homes and creating real wealth for our retirement.

Our interest payments make up the largest portion of the mortgage payments in the early years of the loan. The interest we pay on our Home Loan, up to a maximum of $1 million in mortgage debt that's secured by a first and second home is tax deductible. These deductions will reduce our taxable income when calculated against our taxes due at the end of the year. The rules on these deductions are not too complicated once you know where to look. The $1 million level applies to joint tax filers. If you file single or separately you receive half the deductions allowed.

The interest we pay on a home improvement loan is also deductible against our end of year taxes, but calculated a little differently. We can deduct all the interest on a home improvement loan so long as the work is classed as "capital improvement". Repairs, maintenance or cosmetic upgrades do not count and are not tax deductible. Capital improvements increase the home's value. Adding a new room, a bathroom, anything that prolongs its life such as a new roof or adapting the home for new uses to assist older people or people with disabilities would be included for this purpose.

The Taxpayers Relief Act of 1997 which covers the exclusions on Capital Gains allows married couples who file jointly to keep up to $500,000 tax free profits on the sale of a home used as a principal residence for at least two of the prior five years. This amount is halved for those who are filing single or separately. Our taxable capital gains are reduced by the amount of our selling costs. These include real estate commissions, title insurance, legal fees, advertising, and inspection fees. Capital Gains are calculated on the following basis: the original purchase price, plus the cost of capital improvements, minus any depreciation and the selling cost.

With more and more people creating "Home Based Businesses" there are tax deductions available. If you use a portion of your home exclusively for business you could qualify to deduct a percentage of costs related to that portion. You can include a percentage of your insurance, repair costs, utility bills and depreciation.

It would appear that the "Grass is not always greener somewhere else" and sometimes the solution to our problem is right there, on our own doorstep.

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