Deducting Your Dwelling

Same goes for the sale of your vacation home. Sell it at a loss, and it's your problem. But if you sell it at a gain, Uncle Sam does the happy dance, because the gain from the sale of a second home doesn't qualify for the home-sale exclusion. You owe tax on the whole amount.

Here's a planning tip: If you still own a vacation home and are contemplating retirement soon, sell your principal residence and let the gain qualify for the exclusion. Then move into your vacation home. As long as you live there for at least two years, it will then become your principal residence, and that gain will qualify for the exclusion when you sell, says Luscombe.

Buy, Buy, Baby

The homebuying market last year was comical, at least for those who weren't involved in the mayhem. In many hot markets, anything decent was priced near $1 million and still needed kitchen and the bathroom renovations.

Let's say you bit the bullet, overextended yourself with a fat mortgage and took a home equity loan on top of that to remodel that 1970s kitchen. The least you can hope for now is some kind of retribution on your tax return.

Well, not so much. Sure, you'll get a mortgage-interest deduction on Schedule A - Itemized Deductions, but if you signed on for a low-interest rate loan, that deduction may not be as juicy as you hoped.

And remember the rules. You can deduct the interest on home-mortgage loans up to $1 million. So if your mortgage is $1.2 million (how do you sleep at night?), you can only deduct the interest on the first $1 million.

The home-equity world is different. Typically, you can only deduct interest on home-equity loans up to $100,000. That's because many folks use home-equity loans to buy cars or finance that trip around the world, so the IRS has to set some limitations for pleasurable uses. But if you can prove that the loan is used strictly for home improvements, the $100,000 limit doesn't apply. In that case, your loan can max out at $1 million, and the interest will still be deductible.