Mortgage interest deduction is also like real estate property taxes, medical expenses, and charitable contributions. An interest deduction on property loan permits to reduce taxable income on interest paid on the mortgage. Taxpayers paying mortgage interest should know that their itemized deductions must not go above their usual deduction.
They can save their money on their taxes by itemizing but with some limitations.
Dollar Limitations
There is less amount of interest which can be deducted on mortgage each year. These are of two types one is called “home acquisition debt” and the other is called “home equity debt”.
- Home Acquisition Debt: Interest cannot be deducted on more than $1,000,000 of home mortgage loan for most important home and less important residence. Home acquisition debt means any loan whose intention is to buy, to build, or significantly to improve a qualified home. The limit is reduced by 50% if you are married, filing for separation. For example, you borrowed $850,000 against your primary residence and $450,000 against your secondary residence and both loans were used only to buy your residences. The loan amounts add up to $1,300,000. As your loan total go beyond the $1 million limit, your mortgage deduction is limited. Suppose both loans have a fixed interest rate of 6% and your total interest paid for the year was $78,000. But as it is home acquisition debt so interest on the first $1 million only should be deducted. Thus only $60,000 is deduct-able.
- Home Equity Debt: In this type of loan interest on more than $100,000 of home equity debt cannot be deducted for most important home and less important residence. Home equity debt means any loan whose reason is not to buy, to build, or significantly to renew a qualified home. The home equity debt is bound to reduced up to 50% if you are married, filing for separation. If indebtedness is beyond the fair market value of home then deduction for home equity interest may be reduced. It can be even less the $100,000 limit.
Jointly Held Mortgages
A person is allowed to deduct just the interest that he pays, in spite of which he receives for the joint loan obtained by two or more borrowers.
Detailed information is available for deducting interest and for distribution of interest among more than two borrowers. Payments cleared by co-borrower, to avoid foreclosure can also deduct the interest at the will of co-borrower. Even if the interest was supposed to be paid by someone else.
Home Construction Loans
Construction expenses are also deduct-able, for which the proceeds have to be utilized to buy the land and for house building. The cost for two years before construction is completed is considered with the one million U.S. dollars of debt to buy a house. In case you want to sell a property after above deductions then you have to give some money back.
Points
Points paid on acquisition debt for main and less important residences are fully deductible in the year of payment. On the other hand, points paid on refinancing must be amortized over the life of the loan.
