For many years, homeownership has been the American dream. And over the years, Congress has enacted tax laws that encouraged the American taxpayer to own a home.

For example, if you bought your first house many years ago, the house has appreciated significantly in value. While it was appreciating, you were also entitled to deduct mortgage interest and real estate tax payments. When you sold your house, and purchased another principal residence within two years, if your new house was at least as expensive as your old house, you were entitled to "roll over" your profits without having to pay tax on your profit. Then, when you reached 55 years of age, if you had lived in the house three out of the last five years, the first $125,000 of gain upon sale of your house was exempt from income tax.

Thus, Congress was encouraging people to own houses, buy more expensive houses and people were assured of a tax-free cushion as they grew elderly.

In 1986, however, when Congress enacted major tax reform, a new philosophy toward homeownership began to be heard. Legislators began to be concerned about differentiating between ownership and renting, and also significantly reduced the value of the various real estate deductions.

However, the basic homeowner deductions have not been affected, and this tax series will discuss some of the basic tax rules applicable for real estate owners and investors.

Today's column will provide a preliminary list of deductions available to the average homeowner. As a homeowner, you may deduct the following expenses:

Mortgage Interest. At the end of each year, your mortgage lender will provide you with a statement indicating how much interest you paid last year, and what the current principal balance is on your mortgage loan. If property taxes are escrowed by the lender, the statement will also indicate the amount of the real estate taxes paid.

Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations: Acquisition loans up to $1 million and home-equity loans up to $100,000. If you are married and file separately, the limits are $500,000 for acquisition loans and $50,000 for home-equity loans.

Keep in mind that Congress used the words "acquisition loans." To qualify for such a loan, you must buy, construct or substantially improve your home. If you obtain a refinance loan for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan. However, it may qualify as a home equity loan.

Let's say that several years ago you purchased your house for $100,000 and obtained a mortgage (or deed or trust) of $80,000. Last year, your mortgage indebtedness had been reduced to $75,000, but your house was worth $200,000. You refinanced and obtained a new mortgage of $150,000. The acquisition indebtedness is $75,000.

The additional $75,000 that you pulled out does not qualify as acquisition debt, but since it is less than $100,000, it qualifies as a "home-equity loan." The IRS has ruled that you do not have to take out a separate home-equity loan to qualify for this aspect of the tax deductions. However, if you had borrowed $200,000, you would only be able to deduct interest on $175,000 worth of your loan (the $75,000 acquisition indebtedness, plus the $100,000 home equity). The remaining interest is treated as personal interest. For 1990, only 10 percent of the interest on the excess is deductible; beginning in 1991, none of the remaining interest is deductible.

Although Congress has been making changes in the interest deduction concept since 1986, for all practical purposes, a home-equity loan can be obtained for any purpose whatsoever. You no longer have to justify your loan as meeting certain requirements, as was the case in 1987.

Points. These are also called loan origination fees, premium charges or discounts. Points are deductible in full in the year of payment, provided that the amount of the points is consistent with lending practices in the area in which the house is bought. Each point is equal to 1 percent of the loan amount.

The IRS has recently ruled that effective Jan. 1, points do not have to be paid separately. For tax year 1990, if you paid points it would have been advisable to write a separate check to the lender or the escrow company to reflect that these points were separately paid.

Points paid to obtain a refinanced mortgage may or may not be deductible. If you make substantial improvements to your house, and refinance for the purpose of covering these improvements, then the points would be deductible. But if you are merely changing one interest rate loan for another, or pulling out new money from your house, the points are not deductible in full, but rather have to be allocated over the life of the loan.

Taxes. Real property taxes -- state and local -- can be deducted. Local benefit taxes are included in this category.

Real estate taxes are only deductible in the year they are paid. Thus, if you escrowed last year with your lender for this year's taxes, you cannot take a deduction for these taxes when you file your 1990 tax return. As mentioned above, if the lender pays taxes for you, you will be given an annual statement from the lender, which includes the amount of the taxes actually paid.

Keep in mind that if you bought your property last year, you may have reimbursed your seller for a portion of the prepaid taxes through the end of the year. Review your settlement sheet carefully; line 106 on page 1 of the statement will reflect this tax allocation, which is payment by you and deductible.

Your settlement sheet is a very important document, and must be kept with your other valuable papers. Some of the items listed on the settlement sheet may be deductible for the year in which you purchased your property. Other items, such as title examination, title insurance, survey costs, and recording and transfer fees, are not deductible in the year you purchased your property, but will be added to the basis for determining your gain when you sell your property. Since the capital gains tax can cause major financial problems for many homeowners, every legitimate tax deduction you can take should be preserved and documented.

This is not intended as a complete list of all tax benefits available to homeowners. Everyone's tax return is different, and you must review your own tax situation with your accountant or tax adviser. The additional costs of these professional services often is offset by considerable tax savings, even if some of these professional costs may not be deductible for tax purposes.

NEXT: The "principal residence." This is a very important concept in real estate tax law, and -- with proper planning -- can save you considerable tax dollars.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.