Can I Deduct Mortgage Interest?

You can deduct mortgage interest but you can only do so by following the regulations of the Internal Revenue Service (IRS). Currently the rules allow you to claim the interest but there are restrictions on what property you can claim and there are limits to the amounts that are deductible. You can deduct the interest on you primary house, your vacation house, or your rental house. All will require their own separate form.

If you have a home loan, a second home with a loan, or a home equity line of credit (HELOC) you can claim the deductible if you bought your house on or before October 13, 1987. If you bought your home after than date and paid less than $1 million you can claim the deductible. If you took out a second mortgage or HELOC for less than $1 million after that date you are eligible. If you are married filing separately, then you have a limit of $500,000 instead of $1,000,000. If you took out a home loan and used the money for something other than the home building or home purchasing or home improvement then you have a limit of $100,000 and the amount must be less than the amount of equity in your home. You can deduct mortgage interest in you meet these stipulations of the IRS.

If you have a home loan that does not fit the criteria listed in the above paragraph, you can deduct mortgage interest, but only a portion that you paid. If your mortgage(s) are more than the one million limit you will pro-rate the interest and pay that percent. Example: You have $1.2 million instead of $1 million. You divide one million by the amount you have to get the percentage amount that you can claim. $1m/$1.2m = 83.33%.

If your debt is more than your equity you can also pro-rate and claim some of the interest. The limit is $100,000 or amounts that are lower that are the current value of your home. Which ever amount fits your situation you will use that amount then deduct the amount of the debt. Here’s an example: You have a home that is appraised at $150,000. You have equity of $30,000 and you have $120,000 left to pay on the note. If you take out a HELOC for $35,000 and use the money to pay another debt (credit cards) then you will have to pro-rate the amount of interest you can claim. The home is $150,000 minus the $120,000 you owe = $30,000. $35,000 HELOC minus $30,000 equity = $5,000. You will not be able to claim interest on that $5,000. Let’s look at a different example: All the above figures are the same, but you used the proceeds of the note to remodel your home. You may deduct interest on the entire $35,000 because you reinvested the money into your home. Remember, the limit is one million.

If you want to claim a deductible for interest on rental real estate you do not have the limitations listed above. If you are part owner you are limited to the share that you paid of the full amount. You will file a Schedule E where you report the income and expenses from rental property. If you own 25% of a rental unit you can claim 25% of the interest paid. Example: $30,000 total interest paid X .25 = $7,500. Your portion to claim on your Schedule E is $7,500.

You can also deduct any points that you paid for your home mortgage and the mortgage insurance premiums. You will have to read the instructions that the IRS lists with the forms. If your filing status is married filing jointly you cannot make more than $100,000. If you are filing separately you are limited to $50,000 income. If you have rental property then you will deduct points over the term of the mortgage. If you need further information you can read IRS Publication 527, Residential Rental Property.

The lender who carries the note on your property is required to mail you Form 1098 at the end of each tax year that you paid more than $600 in interest. For your home mortgage you will itemize on Schedule A. If you have rentals you will use Schedule E. You now realize that you can deduct mortgage interest on your personal income tax return, but you must follow the rules published by the IRS in order to do so.

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