Is your house an asset or a liability? Does it put money in your pocket or does it take money out? If you're like most homeowners, you might view your home as your biggest asset. Yet, it doesn't create cash. It takes cash. As time goes on, the value (hopefully) increases and you pay down the mortgage loan, so that your equity increases. That's how your house acts as an asset.

There's more that your home can do for you. In fact, there are three great ways to have your home start paying you, instead of the other way around. We call these "home loopholes;" the tax loopholes that the government wants you to use. A tax loophole is actually a government incentive to promote public policy. Follow the rules, and you'll put more money in your pocket and still be able to sleep at night.

Home Loophole #1: Home office deduction

The home office deduction is one of the most misunderstood tax loopholes. There are three rules to get this deduction:

• You must have a business.

• You must have a space in your home that is used exclusively for the business.

• You must regularly do some kind of business activity in that space.

That's it. You don't need to have a separate entrance or see clients in your home office, but you need to do some sort of regular business activity (phone calls, emails, filing) in the space. You can have another office and still take the deduction for your home office. This space can be a spare room or even the corner of a dining area. Now, let's go through these three requirements in a little more detail.

If you receive a Form 1099 as an independent contractor, you have a business. If you have a part-time activity in which you make money (or in which you plan to someday make money), you have a business. Face it, if you're spending your time working, even if it's part-time, as a real estate agent, you have a business.

The home office deduction is calculated as a percentage of the business square footage of your home applied to the total square footage. In other words, if your home office is 200 square feet and your home is 2000 square feet in total, then 10 percent (200 divided by 2000) of your home expenses are deductible against your business income.

Home Loophole #2: Move

If you live in your home for two of the previous five years, you can take a capital gain exclusion of up to $500,000 if you're married, filing jointly and $250,000 if you're single. Chances are you've heard that strategy before, but had you ever thought about making it your career?

One of my clients will buy a fixer-upper property, fix it up, live in it for two years and then sell it for a gain. Kurt made $110,000 after all expenses on his first home like that, after living in it for 2 years. Remember that's tax free. Now, how hard would you have to work in order to put $110,000 after tax in your pocket after two years? Well, Kurt makes that much simply by moving.

Home Loophole #3:

Combine #1 & #2 for best of all worlds! Maybe you've heard one of the tax myths that states that having a home office is bad because you pay tax when you sell your house. That's completely untrue! In fact, you can have a home office and take a deduction for it every year you own your home. Then, when you sell the home, you can still take advantage of the tax free gain exclusion.

You have a choice with your home -- you can pay for it or it can pay you. Home loopholes make all the difference.

Published: May 10, 2006

Use of this article without permission is a violation of federal copyright laws.

Diane Kennedy, the nation's pre-eminent tax strategist, is owner of Diane Kennedy & Associates, a leading tax strategy and accounting firm and founder of TaxLoopholes. She is the author of The Wall Street Journal and Business Week bestsellers, Loopholes of the Rich and Real Estate Loopholes, and co-author of The Insider's Guide to Real Estate Investing Loopholes, The Insider's Guide to Making Money in Real Estate, and TaxLoopholes for eBay Sellers. Register for free Tax Strategy updates and e-Newsletters delivered via email from TaxLoopholes.com. You will be updated on current tax law changes as well as proactive tax strategies the wealthy use plus news regarding Diane Kennedy.