Millions of US homeowners rely on
the Mortgage Interest Tax Deduction to reduce the true
cost of ownership of their homes and have more disposable
income. Introduced in 1913 along with the Income Tax Act,
the Home Mortgage Interest Tax deduction can be used to
your advantage if you know the rules.
Limits of the Home Mortgage Interest
Tax Deduction
All interest paid on mortgages can
be deducted from your US Federal taxes if you meet the
following requirements:
There are 2 types of debt that fall
under the Home Mortgage Interest Tax deduction provision
and are tax-deductible. The first type of debt is debt that
was acquired in order to build, purchase or improve your
home. The second type of debt is called equity debt because
the collateral used is drawn on the equity of your home.
You can therefore take out a maximum debt of $1.1 million
and deduct the mortgage interest from your taxes payable.
However, any of the mortgages you acquire must fall into
1 of the following categories:
- Debt Acquired Before October
13, 1987: Referred to as "Grandfathered
debt", you can deduct all interest paid on any of
this debt.
- Debt Acquired After October
13, 1987: If you took out this debt to build,
purchase or improve your home, you can fully deduct all
interest paid on this debt provided the total debt you
acquired (including the Grandfathered Debt) does not exceed
$1 million for married couples or $500,000 for singles.
- Home Equity Debt Acquired
After October 13, 1987: If you acquired debt
after this date for reasons OTHER than to build, improve
or purchase your home, the maximum can be $100,000 for
married couples or $50,000 for singles.
Remember that mortgage interest is
tax deductible only if the debt you acquire is secured debt
- meaning your home is pledged as collateral on the debt
(meaning the bank can possess your house if you do not keep
up with payments). Mortgage interest is NOT deductible on
unsecured debt - unsecured debt is considered as personal
loan.
Qualified Home?
In order to make your mortgage interest
tax deductible, you must make sure your home is a Qualified
Home. A qualified home is one that has cooking, sleeping
and toilet amenities. Types of houses that can fit into
this definition include:
- Primary home
- Condominium
- Mobile Home
- Boat
- House Trailer
If your house is your second home,
you must reside in it for atleast 14 days a year in order
to make its mortgage interest tax deductible and you can
only have 1 second home. If your second home is rental property,
you must LIVE in it for atleast 10% of the total time the
property is rented out.
Home Mortgage Refinance
Refinancing your home mortgage allows
you to shorten the term of the loan and reduce your monthly
mortgage payments. If you refinance your home without taking
on additional debt, all the interest paid on your mortgage
is still tax deductible.
IRS Audit
If the IRS (Internal Revenue Service)
audits your home, you should have Form 1098 - Mortgage Interest
Statement ready. You can acquire this form from the bank
or company that holds your mortgage. If you make your mortgage
payments to an individual, supply the following data to
the IRS:
- Name
- Address
- Social Security Number
- Amount of Interest Paid
»
Reverse
Mortgage
Reverse mortgages are powerful tools that help eligible
homeowners obtain a tax-free cash flow.
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