MORTGAGE INTEREST DEDUCTABILITY

What is a qualified home?  It is either your main home or your second home. You can have only one main and one second home at one time. Neither home can be income property, as there are different rules concerning rental and income property.

What interest can be deducted?  Generally, the interest on any mortgage taken out prior to October 13, 1987, is fully deductible. Interest on mortgages taken out after October 13, 1987 to buy, build, or improve your home plus any pre-October 13, 1987, debt are fully deductible if the total amount of these loans does not exceed $1 million. Home-equity loans, or other secured financing taken out after October 13, 1987, totaling $100,000 or less are also generally fully deductible, providing that the total debt does not exceed the fair market value of the property. No deduction is allowed if the proceeds of the loan were used to purchase any security or certificate that produces tax-free income.

How do you calculate the amount of interest that is deductible?  You purchase a new home. If the total of your new mortgage plus the mortgage that you have on a second home does not exceed $1 million, then all your interest is generally deductible.

How do you calculate the deductible interest each year?  First, add the average balance of all mortgages that you had during the year on your qualified home(s). If this amount is less than $1 million and you have no more than $100,000 in equity financing that was not used to improve you home, all interest is deductible. Generally, the only time you must be concerned about the amount of interest that can be deducted is when the original financing exceeds the fair market value (generally the purchase price), or if a home is refinanced for more that the fair market value. Another concern would be if a home-equity loan is taken out in excess of $100,000 and the proceeds are not used to improve the property. Unless the totals exceed the $1 million or $1.1 million limits, all interest should be deductible. It is my strong advice to you to seek competent legal and or tax advice whenever questions arise regarding either legal or tax issues. This advice is even more important today with the complex nature of the tax laws – and we know they are always changing!

Feel free to contact me if I can be of any assistance!