The mortgage interest deduction has become one of the most popular itemized deductions on personal income tax returns. As home prices and home mortgage loans have dramatically increased, many people mistakenly believe that all home mortgage interest is deductible.
Under current tax law only qualified residence interest is deductible. This is interest incurred from buying, building or improving your qualified residence, or from home equity loans on that residence. A qualified residence can be the taxpayer’s primary residence and one other residence (i.e. vacation home) that is not rented out during the year.
As always, the deductibility has certain strings attached. You cannot deduct mortgage interest on acquisition debt greater than $1 million, in aggregate. For example, if you have two personal residences of $800,000 and $400,000, the interest on $200,000 will be nondeductible personal interest.
For home equity loans, the rules are a little different. Home equity debt secured by your principal residence or a second residence is capped at $100,000 of home equity indebtedness. The interest on the qualified home equity loan is generally deductible regardless of how the money is used, except when used to purchase tax-exempt obligations. However, interest on a home equity loan is not deductible for alternative minimum tax purposes unless the loan proceeds are used to improve your home.
Please give us a call if you would like to discuss these rules and any tax-saving strategies that might affect you.
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