Understanding the Home Mortgage Interest Deduction

Home Mortgage Interest Deduction

This seems like an easy discussion. If you have home mortgage interest, you get to deduct it on your taxes, right?

The surprising answer is not always and not necessarily all of it.

First, you can only deduct interest on your first and second homes. No deduction for the third or forth home.

You must be legally liable for the mortgage interest. That is, your name must be on the loan document. Often two people will live together and split the expenses, but the home is owned by only one of them and that person’s name is on the loan document. If you are the one who is not on the loan document, the mortgage interest is not deductible by you.

Further complicating this issue is the type of mortgage interest. On debt up to $1,000,000 used to buy, build or improve your home, the interest is deductible. Additionally, you ,may have up to $100,000 of home equity debt that is deductible, but that isn’t as easy as it appears.

First, the $100,000 is combined for both first and second homes. Second, each home can take the lesser of $100,000 or the fair market value reduced by the acquisition (buy, build, or improve) debt.

Here an example is handy:

Mary’s home has a fair market value of $300,000 and acquisition debt of $260,000. Her home equity deduction is limited to $40,000. The lesser of $100,000 or the fair market value reduced by the acquisition (and/or grandfathered debt). $300,000-$260,000= $40,000. If she takes out a home equity loan for more than $40,000, the remainder will be treated as personal interest unless it can be traced to an investment or business use.

When you visit your tax preparer, he/she needs to know more than the amounts stated on the 1098’s the mortgage companies provide.

This is a much simplified explanation of what has become a very complex issue. Simple mortgage interest deduction isn’t simple at all!