The average American has most of his wealth tied up in his or her home. But is that home an asset, or a liability? We think of our home as an asset, yet if assets put money into your pocket and liabilities take money out, aren't our homes really liabilities?

Maybe. In an appreciating market, our homes are increasing in value (hopefully) faster than the cost of our mortgage debt. In a flat market, or an upside down market, the answer may be a little different. At least until you try to sell the property, that is. Remember, as long as you own it there is no loss, except on paper.

But did you know that there are certain tax strategies that can help your home make you money? Back in February I told you about one of them: the "2 in 5" rule, which says that once you've lived in your home for two out of the previous five years, you get a tax break when you sell it. If you're married and you file a joint tax return the first $500,000 of gain (the difference between what you paid to buy the property and what you sold it for) you make on the sale is tax-free. If you're single, you get a tax break on the first $250,000 of gain.

Here are some more ideas to help your home make money for you:

1. Rent out Part of Your Home. If you rent out part of your home, you've created a business opportunity for yourself just the same as if you had a business operating out of it. The difference is that this is not a home office. In this particular case, you will have a rental property that is reported on Schedule E. That means that you can now deduct the pro-rata portion of home-related expenses against the rental income as well as the depreciation. And, when you sell your home (as long as it's your principal residence), you still get the benefit of the tax-free gain exclusion on the portion of your home that was used for business purposes.

2. Create a Home Office. If you've got a legitimate business, then establishing a home office will go a long way to helping you save money, no matter how much you make. By determining the percentage of your home that is devoted to your home office (i.e., 10%, 15%, etc.), you now have a ratio to divide up all kinds of home-related expenses, such as mortgage interest, heat, light, power, sewer, etc., and apportion those expenses to your business. This comes in particularly handy if you've got a high income that is preventing you from taking the full mortgage interest deduction, because the part that is apportioned to your home office is treated separately from your personal mortgage interest deduction. You can also take a depreciation deduction for the percentage of your home that is devoted to your home office, which can save you hundreds or even thousands on your tax bill.

   In order to take the home office deduction, you will need to have a portion of your home used exclusively for business purpose. You can't use a corner of the dining room table or the kitchen counter. It needs to be a spot that is only used for business. And, it needs to be a place in which you regularly conduct some kind of business.

3. Move Out Early -- and Still Save. Life is all about uncertainty, and here's a case where Congress truly understood that fact. When Congress was creating the "2 in 5" rule, they also created a loophole for people who needed to move before the 2-year period was up. If you have to sell your home under certain unforeseen circumstances, you can take a partial gain exclusion. For example, if you're married and live in your home for only one year and qualify for this exception, you'll be able to have a tax free gain of up to $250,000. That's one year out of two, or half, of the full $500,000 gain exclusion.

Here's what the IRS considers qualified "unforeseen circumstances":

• Death

• Disability

• Multiple births from the same pregnancy

• Change in employment

• Change in self-employment

Take a good look at the last two items on this list. If you have your own business, you know the one constant is change. That means that if your business has a change you can qualify for the unforeseen circumstances exception.

These are just a few strategies, but there are more! Visit the website, taxloopholes.com/realestateagents to download a FREE special report called, "Ten HomeLoopholes to Get More Out of Your House."

Published: December 6, 2007

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