Taxes and your Mortgage

Taxes and Your Mortgage

The mortgage interest tax deduction, introduced in 1913, is used by millions of Americans to lower the taxes they pay. If you are itemizing your taxes on IRS form Schedule A, you own the home and the mortgage is a secured debt, then usually you can deduct the total of your mortgage interest payments.

Types of Interest
Mortgage interest includes interest you paid on loans to buy a home, home equity lines of credit and construction loans. The amount you can deduct is limited. Plus, you can only deduct interest paid on your main home and a second home. If you own more than two homes or your second home is also used as a rental property, you should consult a qualified tax specialist to determine your interest deduction allowances.

If you refinance without adding to the amount you owe, then all interest generated by the mortgage remains tax deductible. If you do take out additional loans against the equity in your home, for example with a cash-out refinance, then you will have limits on the amount of interest you can deduct. If your mortgage was secured to purchase land and build a home, you may also deduct the interest.

The above types of loans are considered "acquisition debt": you used them to acquire or improve a property. There is a $1 million limit on acquisition debt for the purposes of interest deduction. On an "equity debt," a loan taken out for other purposes that draws on the equity on your home (such as a HELOC), you are limited to deducting interest on $100,000 or less. Some other restrictions may apply as well.

Additional Deductions
If you pay points on your mortgage, they are fully deductible in the year they are paid for your primary and secondary residences. However, points paid on refinancing must be amortized over the life of the loan. You can see what points you paid on the statement your lender sends you at the end of the year, Form 1098, or on your HUD-1 closing statement.

State and local property tax is also deductible if you own the home. If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. Taxes placed in escrow are deductible but your entire escrow may not be; you need to consult your escrow company to determine the amount of real estate tax that was paid.

If you own investment properties, you can deduct interest on the loan you obtained to purchase the property, the expenses you incur such as retaining a property manager and repairs to the property. You can also get credit on depreciation of the property. There are numerous benefits to owning investment homes: your tenants help you pay off the mortgage, you get a number of tax write-offs and in general the property will help you lower your overall taxes. Consult a tax advisor for more information.

Preparing for Tax Time
Your mortgage lender(s) will send you a Mortgage Interest Statement, Form 1098, at the end of the year. This form reports the total interest that you paid during the tax year. You do not need to attach these to your return, since the financial institution sends a copy of Form 1098 directly to the IRS. If you bought or sold a home, you will also need the HUD-1 Settlement Statement from your escrow company.

If you have more questions about purchasing or refinancing your home, I'd be happy to discuss your options. Call me today to learn more about making your mortgage work for you!

* We are not a tax advisory firm. The information contained in this article is for informational purposes only and may not reflect current tax year rules and regulations. Consult your tax advisor or the IRS for current tax year rules, restrictions and regulations