Mortgage Interest Deductions for Taxes
Declaring the interest from mortgages on first and second homes is one of those strategies that every taxpayer who itemizes his or her deductions should use. In general, mortgages that are used for the purposes of purchasing a home, building a home, or making improvements to a home qualify for this deduction. Moreover, the interest paid on home equity loans also qualifies for this tax deduction. Certain limits and circumstances exist on the qualification of the loan for this deduction and in determining the qualified residence interest depending on the year that it was acquired, the purpose of the loan, the amount of the loan, the type of loan, and the existence of other loans.
What type of home qualifies for this deduction?
A qualified residence is your first home, your second home, or both. Your first home is typically your primary residence where you live the majority of the year. A second home must meet certain circumstances in order to be considered a qualified residence. Additionally, special circumstances apply if the second home is rented throughout all or part of the year. In particular, you must live in this second home for the greater of the following two sets of circumstances- a minimum of 14 days out of the year or 10 % of the days that you rent the home out to others. If the home
What is qualified residence interest?
Qualified residence interest is any interest that you pay due to acquisition indebtedness or home equity indebtedness in a given tax year on the qualified residence or residences. Both of these terms are explained below.
What is Home Acquisition Indebtedness?
Acquisition indebtedness is the mortgage loan that you take out specifically for the purpose of purchasing your home, building your home, or making substantial improvements upon your existing home. The home must be used as collateral for the loan in order for it to qualify.
Additionally, specific dollar limitations exist on acquisition indebtedness. The acquisition indebtedness that can qualify for a deduction on the interest paid on the loan has a limit of one million dollars for married couples and $500,000 for individuals or married couples filing separately.
An example can be used to clarify acquisition indebtedness. If a homeowner acquired a mortgage for $300,000 in order to purchase his first home, then this amount of the mortgage is the acquisition indebtedness. Repairs do not qualify as improvements. Therefore, loans taken out to finance home repairs do not qualify for home equity indebtedness.
What Is Home Equity Indebtedness?
Home equity indebtedness is the home equity loan that you take out for any purpose in addition to any acquisition indebtedness that you already have. The loan can be secured by wither your first or your second home. It is money that you borrow against your home’s equity for purposes other than home improvement.
However, special rules again apply. The home equity indebtedness is limited to the smaller of the two following conditions- the fair market value of the home less the total indebtedness of the home or the sum of $100,000 if married. If filing individually, this amount is reduced to $50,000. Both amounts include the primary residence as well as the secondary residence.
Home Acquisition Debt
Unfortunately, any acquisition indebtedness that was incurred prior to October 14, 1987 must be subtracted from the dollar amount of any new mortgages to determine your acquisition indebtedness. Prior to this date, the entire amount of interest paid on mortgages regardless of the amount of the loan was tax deductible.
Special Exemptions to the Rules
Mortgage interest on a third residence cannot qualify for this deduction.
Any money that you borrowed prior to October 14, 1987 is exempt from the restrictions that are set up for newer loans.
For home equity loans prior to October 14, 1987, a restriction is in place that specifies that the purpose of the loan must be for specific expenses such as home improvements, educational expenses, or medical costs.