Home mortgage interest deduction – don’t miss out

Your Guide to State, Local, Federal, Estate + International Taxation

home mortgage interest deduction, deductions, taxThe home mortgage interest deduction is a topic we have covered in the past, but with the soaring price of houses in this rebounding market, it’s a good time to remind ourselves of the rules for this deduction.

The interest paid on a loan is fully deductible if the proceeds are used to buy or build a residence. This includes your personal residence and one vacation home. This type of financing is called acquisition debt; it can’t exceed an aggregate of $1.1 million for all interest to be deductible, and must be secured by your home. If your acquisition debt is over $1.1 million, you can only deduct the pro-rata portion of the interest relating to the first $1.1 million of debt.

Acquisition debt includes debt from refinancing your existing loan to pay for an expansion or remodeling of your home. It also includes debt from a new loan (presumably with a lower rate) that is used to pay off the previous loan that you used to buy your home.

You can’t deduct the interest you pay on a consumer loan to pay for a personal asset or expense, such as buying a new car, or paying medical expenses. However, you can transform that nondeductible expense into fully deductible interest if you use your home as collateral for the loan, and the total amount of such home-equity debt doesn’t exceed $100,000.

As housing prices continue to rise, it becomes increasingly important to be aware of the home mortgage interest deduction rules to ensure that you understand how they can affect your tax picture.

Michael Anderson, CPA