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Home and Mortgage Taxes: A Primer

» Introduction
For many Americans, the homes we own represent our greatest investments. Homes, like stocks and mutual funds, can go up or down in value. That said, home ownership is a grand slam investment-wise as homes historically appreciate in value and offer great tax advantages, too.
» Step 1
Interest -- As you plan your year-end tax moves, be sure you're up to date with your payments on mortgage and home-equity loans that carry deductible interest. You may be able to beef up your home-mortgage deduction by making your December payment before year-end, even if it's not due until the following January.
» Step 2
Points on Home Mortgages -- Points paid on a mortgage to buy your principal residence remain fully deductible in the year paid, assuming the points amount to prepaid interest, which they almost always do. If you plan to settle on a home around the end of the year, closing the deal and paying the points by New Year's Eve can give you a big deduction on the tax return you file the following spring. Note that deducting points all in the year in the year of purchase is an election and not a requirement. Amortizing points over the life of a loan is sometimes the wise tax choice. An example would be where the taxpayer purchases the home late in the year and even with the points doesnít have enough deductions to itemize.
» Step 3
Home Equity Credit -- The special status of home-equity debt offers great tax-saving opportunities. If you can exchange nondeductible personal borrowing for deductible home-equity borrowing, you get Uncle Sam's help paying the interest on your debts. This makes home-equity lines of credit the debt of choice for millions of homeowners. These loans offer a line of credit-which you can usually tap simply by writing checks-secured by your home. In addition to preserving the deductibility of interest charged, these loans often carry lower interest rates than unsecured borrowing.
» Step 4
Rental Property - As part of their end-of-year tax planning, owners of rental property can pull down their taxable income by scheduling and paying for repairs on their units before year-end. Be sure, too, that you're up to date on paying other deductible expenses, such as property taxes, mortgage interest and insurance premiums. These costs will trim taxable rental income or increase your loss.

As long as you actively manage the property and your adjusted gross income is under $100,000, you can deduct up to $25,000 of rental losses against other income.
» Step 5
Vacation House - IRS rules state that if you use a vacation home for more than 14 days or 10% of the number of days it is rented, your home is considered a personal residence. That limits your rental-expense deductions to the amount of rental income. In other words: no tax loss to shelter other income.

Limit personal use to pass the 14-day test, though, and the house is considered a rental property.

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