ncle Sam wants you to own a home.

It has been ingrained in American society that we should own our homes and to prove it, the government offers homeowners one of the single biggest tax breaks available to individuals.

For most people, owning a home effectively lowers their monthly taxes by several hundred dollars. Both the interest and real estate taxes you pay each year can be deducted if you itemize.

In the early years of your mortgage, almost all of your payments are interest. If you're in the 31 percent tax bracket and pay $10,000 in interest and taxes on your house, $3,100 of those payments come from the IRS in the form of income taxes not paid.

Interest deductions on a first mortgage are straightforward. They apply to both first and second homes. You can deduct all of the interest you pay on a first mortgage each year, up to a $1 million loan.

Let's say you pay $1,400 a month on your mortgage and of that, $1,000 is in interest payments. If you're in the 28 percent tax bracket, that means the government is, in effect, helping you lower your monthly payments by $280. That's $3,360 off your yearly tax bill.

If you refinance your mortgage, you can take interest deductions only on the amount of principal you paid off. If the refinanced loan is greater than the paid-off amount, you can usually deduct the additional interest as a home equity loan, even though the entire principal came from one loan.

When you purchase, you also may have to pay your lender points for a lower loan rate. Each point is equal to 1 percent of the loan's value and is treated as pre-paid interest by the tax code.

So, you can deduct the amount in the year paid. Ask for IRS Form 1098 from the lender. However, if you borrow to pay the points, as part of your mortgage, the resulting interest payments are also deductible, as part of your first mortgage deduction. See IRS PUB 936.

You can take up to $100,000 in interest on the principal of a second mortgage or homeowner's loan, provided that the value of the property exceeds the first and second combined. And unlike first mortgages, where deductions are available only if you use the money to buy, improve or build your home, you can use the second home equity loan for any purpose (except buying tax-free investments) and still deduct the interest.

If you borrow more than $100,000 and use the money to invest in taxable assets or to lend to your business, you can deduct interest on more than $100,000 as an investment or business loan interest deduction.

The taxable profit on residential real estate is figured by taking the "adjusted cost basis" and deducting it from the "adjusted sale price."

Basis is defined as your purchase price minus any costs associated with the purchase such as closing costs, attorneys' fees, mortgage fees or points. From this figure, you can also deduct improvements you made to the property, such as the $1,000 for that new floor or the $5,000 to install a new fireplace. This brings you to the adjusted cost basis.

The thousands of dollars in improvements that you make fixing the lawn or installing nursery room wallpaper is not deductible. To qualify as a tax deduction, a renovation must improve the home's structure - not just for decorative purposes or as part of ordinary repair or maintenance. The key to success is record keeping. Even if you live in a home for 50 years, the first dollar of qualified improvement costs are deductible.

The Taxpayer Relief Act of 1997 heralded a new strategy for homeowners, because it allows you to keep up to $500,000 in profits if you sell your home. The only requirement is that it must have been your primary residence for the previous two years. In the past, the government taxed any profits on the sale of your home unless you rolled over those profits into the purchase of a newer home.

Now comes a new homeowner tactic, in which people should look at rising home valuations as a potential investment technique. You could buy your home in a neighborhood where you know home values will rise rapidly, but the house isn't exactly the home of your dreams. Two or three years later, with tens of thousands of dollars in tax-free profits, you sell the investment house and purchase a less expensive home that meets your needs, pocketing the profits.

What if you can't sell your house without taking a big loss, but you must leave for a new job? You can still treat it like a primary residence even if you move and rent it out. But you must meet the following requirements:

If you leave your home - or any other real estate - in a will, trust or any other inheritance device, your heirs will have to pay its "date of death value," or the value of the home six months after your death. The valuation date is chosen by the estate representative and included on the estate tax return. If they then sell the property at the basis figure, they won't have to pay capital gains tax.