Real estate deductions
5 Tips Home Edition: Here's how to make your home pay off for you at tax time.
NEW YORK (CNNMoney.com) - Uncle Sam has some nice perks for homeowners. As April 15 approaches, start thinking about the ways you can make deductions for repairs, your mortgage interest or even take the famous home-office deduction.
In today's Five Tips we'll walk you through getting the most out of your home at tax time.
1. Deduct that mortgage interest
Deducting your mortgage interest is one of the biggest freebies Uncle Sam gives you. But keep in mind that the longer you live in your home, the less valuable your deduction will be. That's because most mortgages front-load the interest payments, meaning that as the years go by, your monthly payment will go more towards paying down the principle, and less towards interest on the loan.
At some point you may want to pay off your mortgage early, but read the fine print because you may get hit with prepayment penalty fees. But don't worry. At least you can deduct these penalties from your taxes.
2. Keep your receipts
If you have made improvements or repairs to your home, make sure you keep all of those receipts. When you sell your home, you can use these expenses to reduce the tax you pay on the profit. That profit is called a capital gain. The less profit you show, the less tax you'll have to pay.
So if you've installed a pool, replaced the siding or finished the basement, you can add the cost of those improvements to your base price...and reduce the taxable profit. Of course, you want to stash those receipts in a place that you can find again years later.
3. Relocation compensation
Whether you rent or buy, if you have to relocate because of your job, whether it's your first job, a new job or the same job, you may qualify for a moving deduction. And this can be a pretty big tax deduction, especially if you made a major cross-country move to take a new job.
You will qualify for this deduction if your new job is at least 50 miles away from where you live. You'll be able to deduct expenses like your moving van, moving services, the cost of moving your car or your pets, the use of storage facilities and any hotel rooms you had to stay in while making the move, says Donna LeValley of J.K. Lasser's "Your Income Tax 2006." Use IRS Form 3903 to calculate and claim this deduction.
4. Get damage deductions
If your home sustained damage because of a tornado, a hurricane or theft and you were not compensated by insurance, you may be able to get a deduction on your taxes.
There are some rules. The cost of un-reimbursed damage must be more than 10 percent of your adjusted gross income. And to make matters more complicated, you need to subtract $100 from that un-reimbursed damage before you do that calculation.
These rules we just outlined don't apply to victims of Hurricane Katrina. Anything that wasn't covered by insurance is fully deductible. If your area is declared a presidential disaster area, you have the right to amend last year's tax return and claim this year's loss. This will help you get a refund more quickly.
5. Deduct your home-office
If you're one of those folks who has the luxury of working at home in your PJ's, you may qualify for a home office deduction.
First, you have to use the office for work purposes only. You can't have little Johnny use it as a playroom during the evening hours. Of course, if you're self-employed, taking this deduction is a no-brainer. But if you work for an employer, it must have been your boss's choice to have you work from home, rather than your own preference.
To get a sense of what your deductions could be, get the square footage of your home and find out what percentage your home office takes up. Then deduct that percentage from your general household bills, like your electric bills, heating and repair bills. You would not be able to deduct these household costs under any other circumstances.
Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to firstname.lastname@example.org.