If you itemize deductions, chances are that you are taking a deduction for home mortgage interest.
Here are a few things that you should know:
- Home acquisition debt is defined as a mortgage used to buy, build or improve either your principal residence or a second home. It must be secured by the home.
- You can only deduct interest on the first $1,000,000 of home acquisition debt.
- You can only deduct interest on the first $100,000 of home equity loans that are not used for improvements.
The original mortgage used to purchase your primary home was $500,000. When the mortgage balance is down to $200,000, you refinance for $400,000. Assuming that none of the proceeds of the refinancing are used for improvements, your home acquisition debt is $200,000, your home equity debt is $100,000 and the $100,000 balance is personal debt. In this example, only 75% of the interest paid on the $400,000 is deductible.
You have paid off your original mortgage. You take out a new mortgage for $500,000. Assuming that none of the proceeds of the mortgage are used for improvements, none of the mortgage qualifies as home acquisition debt. $100,000 will be home equity debt. In this example, only 20% of the interest paid on the $500,000 is deductible.
Your average home acquisition debt for the year for your primary residence is $800,000. Your average home acquisition debt for your vacation home is $600,000. In this example, $1,000,000 is treated as home acquisition debt and $100,000 is treated as home equity debt. Only 79% (1,100,000/1,400,000) of the interest paid would be deductible.
There are other more complicated rules that apply to home mortgage interest deductions. As always, this is only meant as a brief overview. If you feel that we can be of further assistance to you, please contact our office to set up an appointment.
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- Doherty & Associates Team