RSS Blog Feed
Mortgage Interest Deductions
Posted at 6:09 PM, Nov. 10, 2006
Current Law: In order to take mortgage interest deductions (MID), taxpayers must comply with the following
rules, where applicable.
1. Debt on a principal residence and a second home, combined, may not exceed $1 million. (If mortgage debt exceeds $1 million, interest on the increment above $1 million is not deductible.)
2. Debt on home equity loans (or lines of credit) may not exceed $100,000.
3. All debt (mortgage debt and home equity debt) must be secured by the principal residence or the second home for which the deduction is claimed.
4. Only debt used to acquire, construct or substantially improve a residence qualifies for a deduction. (This debt
is referred to as acquisition indebtedness.)
is referred to as acquisition indebtedness.)
5. MID on refinancings is allowed only to the extent that the amount of debt on the refinancing does not exceed the amount of outstanding debt that is refinanced.
6. Points (or prepaid interest) on refinanced debt is not deductible but must be amortized over the term of the loan.
7. Interest on acquisition debt is deductible for purposes of computing both the regular income tax and the alternative minimum tax (AMT). Interest on home equity debt, however, is not deductible in computing the AMT.
Take a look at number 5 above.
Do you know anyone who refinanced their home in the last few years...not for improvements, but just to pull
out cash at favorable interest rates, taking advantage of the appreciation in the market? If you know anyone
who falls into this situation, and there are many who do, are they taking a mortgage interest deduction in an amount that they are not entitled to take?
who falls into this situation, and there are many who do, are they taking a mortgage interest deduction in an amount that they are not entitled to take?
Interest deductions on loan amounts exceeding the acquisition loan payoff plus $100,000 are not allowable.
Example:
Buy a house for $200,000 and finance $150,000. Loan paid down to 125,000.
Appreciation and low interest rates allows owner of this property torefinance and new loan amount is $350,000.
Interest on what amount of the $350,000 loan is tax deductible?
Answer: $225,000
Answer: $225,000
I know that there are many who are taking interest deductions they are not entitled to take.
Saul Klein (Internet Crusade)
View more entries tagged with: Mortgages, Interest, Taxes, Deductions