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Three Reasons to Love the IRS
  Legitimate loopholes for homebuyers and sellers alike to pocket serious moolah. They say there are just two things you can count on: death and taxes. But when it comes to owning a home, there's a third: The favorable treatment homeowners receive from the Internal Revenue Service. There are three areas in particular where Uncle Sam helps out in owning your own home:

1. The New Homeowner When buying a home, most expenses aren't tax deductible but there's one exception worth noting. The IRS lets you deduct interest the year it's paid, which is part of each monthly loan payment. In addition, if the date of your purchase is any day other than the first of the month, you will likely pay a charge for "daily interest" between the date of closing and the end of the month. (Look on line 901 of your HUD settlement statement.) Much more importantly, in most cases, the IRS allows loan discount points and origination fees as deductible to the buyer, regardless of who pays them.( Look at lines 801 and 802 of your settlement statement and see if you hit the jackpot.) This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs. Because origination fees of one percent and more are common, this can be a significant amount.

2. Home Improvement and Refinancing You can also deduct interest charged on a loan up to $100,000 used to improve your principal residence in the year it's paid. If you're in a 28 percent federal tax bracket, this can lower your borrowing costs by almost one-third. Known as the "Home Equity Loan" exception, it lets you tap your home's equity for any purpose. For example, if you have a credit card balance of $10,000 at 18 percent interest, you can obtain a home equity loan for $10,000 and pay off the credit card. This means the interest is now deductible and the rate on the loan is likely to be prime plus one or two, usually much lower than credit card rates. This works with all personal debt --with one hitch. In every home equity loan, you've pledged your house as collateral. Fail to pay and you can lose your home. 3. The Home Seller's Windfall Option This is the best, almost unbelievable perk. If you've owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that property and pay no federal income tax whatsoever. (Singles get up to $250,000.) And here's the kicker: You can do this as often as every two years for the rest of your life. This is as good an excuse for getting married as any. Buy a fixer-upper in an up-and-coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes. And most states recognize the federal exclusion, so you put the cash away completely tax- free. You don't have to re-invest, you don't have to be age 55, and you can do this every two years forever. The one restriction is you must own and occupy the house as your principal residence; so don't try this on a rental property by pretending you live there when you don't.

By John Adams
Homestore.com