Your home: the mother of all tax shelters.

• Author: Schnepper, Jeff A.
• Position: Economic Observer

IT IS THE AMERICAN WAY--mom, apple pie, and owning your own home. Let us look at all the deductions and benefits you get when you pay homage to the mortgage gods and go into more debt than your parents earned in their lifetimes.

First, you can deduct all the real property taxes you pay. That includes every cent of state and local taxes for the general welfare. It does not count any trash or garbage collection fees or homeowner association charges specifically stated and billed. If you are escrowing for the taxes, you get the allowance when your bank makes the payment, not when you escrow with the bank. Even if you are a tenant shareholder in a co-op, you may deduct your share of any property taxes paid. There is no limit on the number of properties on which you can deduct taxes paid. If you have 10 homes, you can do it for each.

The government wants to subsidize your home purchase. It does that by making your interest payments deductible. Interest paid on the purchase of your principal residence is deductible. You even can finance the acquisition of additional land, adjacent to your home, and deduct the interest as qualified residence interest. You also can deduct the interest you pay to buy a second residence or vacation home.

There is a cap of $1,000,000 of acquisition indebtedness on which you can take a personal interest deduction. Moreover, you can deduct the interest on as much as $100,000 worth of home equity debt. As long as the house has the equity and the debt is secured by that amount, the Internal Revenue Service does not care what you do with the borrowed money. Use it for whatever you want, including vacations, or a party to celebrate your newfound deductions. If you are in the 30% bracket, that means that $100 in interest paid takes $70 out of your pocket. Uncle Sam pays the other $30 in income taxes foregone. Not a bad deal.

IRS gives up the farm

With gain exclusion, meanwhile, the IRS "gave up the farm." The deal on this one is so good it makes my eyes glaze over. Forget about having to roll over your gain into a new home. Forget about the $125,000 gain exclusion if you are age 55 or older. They are ancient history and no longer sound tax law. Here is the new rule--good no matter what your age. If the property was your principal residence for any two of the five years prior to sale, you can exclude $250,000 in gain ($500,000 on a joint return)! If you qualify under the two out-of-five rule, you normally sign an affidavit at...