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Home, Sweet Deduction

Personal Business: Taxes


The giddy price appreciation that your house enjoyed in the 1980s is no more. But real estate retains one timeless virtue: It's still the repository of sweet tax breaks. The obvious ones are deductions on federal returns for mortgage interest and property taxes. There are a bunch of other real estate maneuvers to reduce the Internal Revenue Service's take.

The most important one is figuring out the taxable profit from selling your house. Selling fees and home improvements can shrink the amount of profit you must report (chart). Sorry, normal repairs, such as replacing a broken windowpane, don't count as improvements, which must boost the house's value (an extra room) or prolong its useful life (a new roof).

Beyond that, most people sidestep taxes altogether by rolling over the sales proceeds into buying the next home within two years. Trouble is, if after several houses you decide to become a renter, the accumulated profits from the previous homes are subject to taxes. "That's why you should hold down the reportable profit, even if you roll over each time," says tax attorney Julian Block, author of The Homeowner's Tax Guide. The tax code does provide a bonus for sellers 55 and over: They can shield up to $125,000 in profits.

Did you lose money selling property? Tough luck. That's not deductible. One hope: Congress is mulling a deduction for home-sale losses that exceed 10% of income.

People who lose money on a sale of residential property converted to a rental are in better shape. They often can deduct some of that. They also get a break if they hang on to it and lose money because rent falls short of mortgage and operating expenses. The maximum deduction is $25,000 for taxpayers with yearly adjusted gross income below $100,000. This phases out for income between $100,000 and $125,000.

NEW RULES? While Congress may restore passive-loss breaks--where losses in property-investment partnerships offset other gains elsewhere--the rules are likely to exclude individuals in favor of big developers.

The tax code has been tightened for second homes, but mortgage interest and property levies remain deductible. However, the combined mortgages from two houses can't exceed $1 million.

Tax breaks for home offices have been circumscribed, but they're not gone. You can take off a portion of housing expenses even if you have a job and use one room of your home to moonlight as a consultant. And if you fill out your tax forms in it, there's no penalty.Larry Light EDITED BY AMY DUNKIN

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