INTEREST: All interest paid on mortgage loans is tax deductible for both first and second homes. At our present interest rates, about 95 percent of the principal and interest (P&I) payments made by homeowners during the first five years of a loan are tax deductible. Points and loan fees are often considered prepaid interest, and may be deductible in the year of purchase.

TAXES: All real estate taxes are tax deductible on personal residences. Part of most homeowners' monthly payments go toward real estate taxes which support our local governments. All of these tax payments may be deducted from your federal income taxes.

WITHHOLDING TAX: Homebuyers may be able to claim additional tax withholding allowances when they buy a home. This would increase their monthly take-home pay, and would be offset by these tax deductions.

MOVING EXPENSES: Moving expenses may be deductible if you are moving over 50 miles from your present location. Actual moving expenses plus cost of trips for job and house hunting may also be deductible.

OFFICE USE: Part or full time use of your home as an office may entitle you to deduct a prorated portion of your housing expenses, operating expenses and depreciation from your income tax. Consult your tax accountant or CPA for specific details.

OVER AGE 55 EXCLUSION: Homeowners over age 55 are allowed to sell their principal residences at a profit without paying capital gains taxes. A one-time exclusion of $125,000 capital gains profit is allowed for homeowners over age 55. With this exclusion, you don't have to purchase another home of equal or greater value within two years to defer your capital gains.

HOME REINVESTMENT: No capital gains are due on the sale of a principal residence if homeowners purchase another principal residence within two years at a cost equal to or greater than the adjusted sale price of their first home. The adjusted sale price is equal to the gross sales price less all selling expenses such as closing costs, real estate commissions, etc., plus all fixing up costs made within 90 days of the sale. You don't have to reinvest all the proceeds of the sale in the second home - all you have to do is purchase another home of equal or greater value, in order to avoid capital gains tax on the profits.

EXCHANGES: Exchanges of one principal residence for another may be tax free so long as the new residence equals or exceeds the adjusted sale price of the old residence.

Although higher interest rates can cast a shadow on real estate purchases, they are not altogether bad news for homebuyers since they are deductible from your net income. For example, if your principal, interest, taxes and insurance (PITI) mortgage payment is $800 per month, and your insurance is $20 per month, then over 95 percent of $780 ($741) per month, or $8892 per year is deductible from your net income. If you are in the 28 percent income tax bracket, this equates to a savings of nearly $2490! So your real annual mortgage costs are really only $6402, or $533.50 per month! So buy a home and let Uncle Sam help subsidize your real estate purchase!