Interestingly, in this situation the buyer can also deduct the points when the home is sold.

"The buyer," says the IRS, "reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them."

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future -- thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller's contribution for points.

If a prime residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any undeducted cost for points can be used to reduce owner's profit from the sale.

Home offices may be deductible.

If a portion of your home is used regularly and exclusively as your principal place of business or for the convenience of your employer it may be possible to write off a portion of such costs as mortgage interest, property taxes and utilities. There are a number of tests which must be met to take this deduction, see IRS Publication 587, Business Use of Your Home for details.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Natural Disasters

The Katrina Emergency Tax Relief Act of 2005 provides extensive tax benefits and assistance to those who were victims of hurricanes Katrina, Rita and Wilma. For details, go to the IRS Katrina relief page or call 1-866-562-5227.

If you have been in a natural disaster -- a flood, hurricane, tornado, etc., contact your local congressional office to see if special tax help is available. Links to congressional offices can be found by pressing here.

Investment real estate can generate substantial write-offs.

If you own rental property you must seek a fair market rental for your property. You may generally deduct mortgage interest, property taxes, repair costs, management by an outside party, depreciation, advertising, insurance, utilities, legal services and other expenses.

It's possible with rental properties to have both a positive cashflow and a loss for tax purposes. However, the ability to use real estate losses to reduce overall taxes may be phased out as income rises above $100,000.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

With a 1031 transaction, investment property is exchanged for "like" real estate. The basic requirements are that within 45 days after the "relinquished" property has been sold, a "replacement" property must be identified. The identified replacement property must then be acquired within 180 days after the sale of the relinquished property.

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