'Tis the tax season and as we all count our blessings, few as they might be with regard to taxes, it's a great time to consider the tax advantages of home ownership.

First the disclaimer, for tax advice we always recommend consulting with your tax advisor before making decisions based on the expectation of income tax deductions.

The primary purpose and benefit for purchasing a home is shelter but as I talk with home buyers, we always talk about the investment advantages of real estate ownership. There is a lot of ground to cover on that topic so we'll save it for a future column. But since we're all in the spirit of preparing tax returns it seems appropriate to cover some of the income tax ramifications of owning a home.

Before we get too far, it should be pointed out that the cow reference is relevant as we'll soon see.

With homeownership at an all-time high of 69 percent of all U.S. households, most homeowners itemize their deductions on their income tax returns to reap the benefit of "writing off" the mortgage interest and property taxes they pay on their home.

Essentially for most homeowners, this means they do not pay income taxes on what they pay in mortgage interest and property taxes. (Current law imposes limits of up to one million dollars of home mortgage debt whether for a first or second home and interest up to $100,000 of home equity debt.)

For example, if you have a mortgage of $150,000 at an interest rate of 6.375 percent, you pay $9,513 in interest the first year. That saves you about $2,663 in taxes if you're in the 28 percent income tax bracket.

Homeownership has always been held in highest regard by political decision-makers.

In addition to the individual benefit of tax preferential treatment for homeowners, many believe homeownership builds and stabilizes communities. Homeowners typically feel a stronger connection to the community in which they live. They are more likely to become involved in activities which strengthen the community and solve community problems. Homeowners have an economic incentive to preserve the community and are more likely to vote and serve on public bodies.

Along with the impact on the economy, these side benefits have long been used as strong arguments in favor of holding homeownership in high priority and continuing favorable tax treatment for homeowners.

So what does the future hold?

President Bush appointed a bipartisan tax-reform panel comprised of nine tax experts to make recommendations for fairer simpler tax laws to the Treasury Department. In a recent public meeting, the panel disclosed a number of possible changes under consideration, including:

• Reducing from $1 million the size of a mortgage on which interest may be deducted. If such a proposal were made, it's possible that the mortgage size would vary by region depending on local home prices.
  
• Replacing the mortgage interest deduction with a tax credit, allowing all homeowners with a mortgage to get a tax break – not just those who itemize deductions on their tax returns.
  
• Reducing the tax rate at which mortgage interest may be deducted. Likely a proposed rate would be a middle-income tax rate, such as 15 percent or 25 percent.
  
• Reducing the total capital gains exempted from tax.
  
• Combining two of these elements -- such as reducing the capital gains exemption threshold and lowering the deduction rate on mortgage interest.
  

Some members of the panel indicated that if changes were made, there would have to be a gradual transition period so as not to upset the housing market or harm current homeowners.

Is this truly tax code simplification or is it also an effort to begin limiting the single major income tax deduction enjoyed by many American homeowners? Some contend it would not be politically feasible to eliminate the deduction for homeowners and that the public outcry would be overwhelming. This is one political debate every homeowner in America should watch.

Housing tip of the month: From all indications, sales for 2006 will be very close to the record year of 2005. For sellers, now is the time to put your home on the market. Many would-be buyers are getting preapproved and starting to shop for their new home.

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