Home Mortgage Interest Deduction

The overwhelming majority of homeowners qualify for a tax deduction for the interest they pay on their mortgage loan.  Let’s look at a few important details about this tax break:

* In order to claim the mortgage interest deduction, you will need to itemize deductions on your tax return.

* A home doesn’t have to be a traditional house.  It could be a mobile home, a houseboat – any place that has sleeping, cooking, and bathroom facilities that functions as a residence.

* The deduction applies to interest paid on a mortgage, home equity loan, or line of credit that is secured by your primary residence or your second home.  If you have three or more such properties, you may only take the deduction on two of them.  However, from year to year you’re allowed to change which of your properties to designate as your second home.

* If a loan is not secured by your primary residence or second home, then the interest cannot be deducted regardless of what the money is used for.  For example, if you borrow money secured by rental property you own, and you use that money to buy a primary residence or second home, this would not come under the deduction.

* If you own property that you rent out part of the year, in order for it to potentially count as a second home, you must use it for more than 10% of the days you rented it out at fair market value or for more than 14 days, whichever is larger.

* The deduction is restricted above the first $1,000,000 in debt to buy or improve your first and second home, and the first $100,000 in home equity debt used for any other purpose.  Loans taken prior to October 13, 1987 are grandfathered in and not subject to these limits.

* To be eligible for the deduction, you must be legally liable for the loan, and have made the interest payments on the loan, and it must be a loan that both you and the lender intend be repaid.

* If you use the proceeds of a mortgage loan to purchase securities that produce tax-exempt income, or single-premium life insurance or annuity contracts, you may not deduct the interest.

* If you live in a house prior to your purchase being final, any payments you make during that period of time cannot retroactively be treated as mortgage payments.  They count as rent, and so are not eligible for this deduction.

Bear in mind that this is only a partial list of relevant factors.  Internal Revenue Service (IRS) Publication 936 is an excellent source for further information about the Home Mortgage Interest Deduction.