by B. B. James

Created on: February 21, 2007   Last Updated: February 08, 2010

Home ownership is one of the few ways that a typical American can have his or her money "work for him/herself" to achieve significant financial gains. Home ownership receives very favorable tax treatment through three factors:

1. The deduction for mortgage interest. It is simple to take advantage of this tax break, as it basically accrues to pretty much anyone who owns a home. Your estimated income is "adjusted" downward each year by the amount you paid in mortgage interest. The government pretends you earned a lot less than you did, and so your taxes are much lower than they would be otherwise. There are no complicated tax forms to fill out, and a taxpayer is given documentation annually by its mortgage holder that lists the amount of mortgage interest paid in the past year. The system could not be easier.

2. The exemption from taxation on the profits of a home sale. You have to meet certain simple conditions, like living in your house for 2 of the past 5 years, but again this is basically available to everyone. This is why trading-up to a bigger or newer home is so easy in this country. Home owners have a pot of tax-free money with which to make the down payment on that new home.

3. The ability of a spouse to transfer a house tax-free to a spouse upon death. The law automatically assumes that the house will go to the spouse, so again this is a simple procedure. Even when a home is inherited by children or grandchildren instead of a spouse, taxes are only rarely paid (taxes are due only if the value of the house makes the entire estate exceed the exemption amount, which is $3.5 million in 2007).

4. Deductible home equity loans. Just like mortgage interest is tax-deductible, so is the interest on a home equity loan. Thus, you can use the equity in your home to get tax-free financing to do work on your house, pay down debts, or put your kids through college. This is exactly how today's generation of parents, who are burdened with consumer debt, will pay for their kids' college education. The federal government basically allows any use for home equity loans to be tax-free, even though the original intent was that the use should be directly applied to the home.

5. Second homes. The federal government lets you have the same great tax treatment on a second home. This is incredible, when you think about it. You can make an investment in a vacation property or a pure investment property, and the government will subsidize it through reducing your taxes! You can even

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