Mortgage Interest Deduction Rules

Q: Tax Playa, can I deduct the mortgage interest on my home?
Kurt, Salt Lake City, UT

A: In general, mortgage interest is deductible.  In practice, however, it is only open to those 30% of taxpayers who itemize their deductions.  Additionally, the deduction tops out after a second home, a large set of mortgages, or a high income.

For more information on the home mortgage interest deduction, please consult IRS Publication 936, "Home Mortgage Interest Deduction."

If you or your spouse is legally liable for a mortgage that is a secured debt on a qualified home, the interest on that mortgage is deductible.

There are several limitations on this:

1. You must itemize your deductions.  For the most part, if you had a mortgage for most of the year, this isn't a difficult threshold to meet.
2. The mortgages can only cover your main home and a second home.
3. Only $1,000,000 total of "home acquisition" mortgage debt is allowed (debt used to pay for your home).
4. Only $100,000 total of "home equity" mortgage debt is allowed (cashing out equity).  This is completely-disallowed for AMT taxpayers.

When the $1,000,0000/$100,000 limits were put in place in 1987, that was a stratospheric amount of debt to carry.  Now, though, it isn't hard to see a married couple having two $600,000 mortgages on two homes.  They are still more affluent than the average American, but Joe Sixpack is catching up.

If there is any business or rental use of your home, the interest must be properly-allocated between personal and business/rental use.

Points paid at closing are fully-deductible if they are to acquire the home.  For refinancings and cash-outs of equity, though, the points deduction must be amortized over the life of the loan.

Like most itemized deductions, the home mortgage interest deduction is subject to the itemized deduction phaseout.  If your AGI exceeds $150,500 in 2006, your home mortgage interest deduction will begin to be slowly disallowed.

These are the basic rules people will run into.  If you have a strange situation, consult a tax professional (hopefully me).

Comments

[Ardy]

If a second home is in a foreign country can we still deduct mortgage interest and property tax on that home?

[Mike]

Just wondering if anyone has an answer on this question - I have similar circumstances.

[Mike]

What happens with taxes when a homeowner faces foreclosure?

Something our office recently discovered could adversely affect a whole lot of people.

Before you consider refinancing, do not go to Countrywide. Don't do it! Just when you think this mortgage mess could not get any worse, Countrywide shocks homeowners now suffering from bad credit. The biggest US mortgage lender allegedly will no longer consider a short sale (effective 3/25/08) for any NON-owner occupant...in all of the US...no exceptions. How could this be? Why would Countrywide do this? Countrywide and Bank of America refuse comment.

[Richard]

Great post,

Mortgage Interest rates are probably the most important part about buying a house. After all, your aim is to borrow the money you need for the least possible cost, so you need to assess which type of interest rate is best for your particular circumstances.

As we move into the last year of 2007, mortgage interest rates are continuing to decrease. They are now at the lowest point in more than two years, thus opening a bit wider the door of opportunity for home buyers. The average rate for a 30-year fixed-rate mortgage is now down to 6.10 percent, with 0.5 points (fees). Last year at this time the rate was 6.14 percent. This is a popular option for many homeowners who are now refinancing their mortgage. :)

[Josh]

We purchased a rental property a couple years ago and the seller carried the contract. We had a fixed interest rate and had it structured such that no payments were required during the life of the loan but the principal and accrued interest would be due when the note was paid off. We just paid off this note and I am curious how to properly deduct the interest on my taxes....do I deduct all the interest that has accrued over the last couple years in 2008 since that is when I "realized" it or should I have been deducting the interest all along regardless of the fact that I hadn't actually made any payments? Thank you!!

[Jules Carney]

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Thanks for the interesting read.

Thanks for sharing

[Jules Carney]

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I am really looking forward to your next post.

Thanks