Over the last few weeks, we have looked at the primary reasons home buyers decide to invest in residential real estate.

First, we saw an all-American desire to achieve financial gain as a primary basis for buying. Last week, we looked at the intangible factor of "pride of ownership" and saw that owners and renters view this as a prime reason to buy property.

This week, we'll look at the tangible world of tax benefits as they apply to homeownership and find a final motivation to own rather than rent.

Our government has included in our system of taxation certain financial rewards for homeowners that nonowners simply do not receive. While the dollar value of these benefits may be debated, their existence cannot, and they serve as one of the three primary reasons buyers behave the way they do.

In addition to raising revenue, our tax system has been crafted and designed to carry out social policy, and one of those policies is to encourage investment by citizens into ownership of their residences.

The theory here is that an owner makes a more committed and involved citizen, one more likely to participate in the political process. Ownership also helps individuals put down roots in a neighborhood and start their own unique contributions that make each community special. For these reasons and others, a long tradition of tax benefits is associated with all aspects of homeownership.

First, the buyer of a principal residence gets a substantial tax deduction when he makes the real estate purchase. This break is in the loan origination fee, which lenders add to "closing costs" to compensate themselves for putting together the loan package.

This expenditure most often appears on the buyer's side of the settlement statement and typically totals about 1 percent of the amount being borrowed. That means the dollar amount involved can be substantial, making the deduction more valuable.

The tax law surprisingly says the buyer can take the deduction for the full amount of the origination fees paid regardless of who pays them. This can be particularly helpful if a seller or builder has agreed to pay all closing expenses as an inducement to purchase. In this case, the buyer gets to have his cake and eat it too.

The Internal Revenue Service simply requires that the origination fees be expressed as a percentage of the loan amount and that they be reasonable for the area. Both requirements are routine.

The next major benefit experienced by home buyers is the deductibility of home mortgage interest. This is the area most hotly debated by self-styled consumer advocates.

There is no debate over the fact that interest on mortgage debt used to acquire or improve a residence is deductible up to a total indebtedness of $1 million. And there is no quibble over the fact that any owner also can add up to $100,000 of home equity debt used for any purpose and still take a deduction for the interest. The disagreement instead centers on the relative value of that tax deduction.

Some argue that a buyer with no other deductions and no charitable giving may lose several thousand dollars of benefits just trying to reach the standard deduction amount. The standard deduction gives each person credit for a certain level of deductions, whether used or not.

Others protest that almost everyone already has some deductible items that are being wasted when the taxpayer fails to itemize deductions. Examples are ad valorem tax on cars and boats as well as charitable contributions. These might include donating gifts to Goodwill or buying Girl Scout cookies.

Some have claimed that the mortgage interest deduction is overrated, especially for buyers at the bottom end of the financial scale.

The correct answer is that both are right. As personal income and net worth grow, the value of deductible items increases. So it varies from buyer to buyer as to degree of benefit. But there is certainly one there, and for most Americans, any degree of tax relief is welcome.

Finally, the tax law rewards sellers who live in their homes at least two full years, then sell at a profit. This may be the most generous tax benefit of all.

The law now says that if you own and occupy a house as your principal residence for any two of the five years immediately preceding the sale, you may exclude any profits from taxation up to certain limits. Single taxpayers are limited to $250,000 capital gains, while married couples are allowed double that amount.

You don't have to reinvest, though you may if you wish, and you can take this exclusion as often as once every two years. This two-year rule is known as IRS Section 121 and is perhaps the most valuable tax benefit we can take associated with homeownership.

 NEXT WEEK: Frequently asked questions about real estate tax benefits.

John Adams is a broker and investor. His Web site is www.money99.com.