Be Tax Savvy! Deducting Mortgage Interest
When can you deduct the interest on your mortgage to lower your income tax amount? There are allowable deductions for mortgage interest, but the federal income tax law is riddled with complex definitions.
Sometimes, it can go over your head. But it does not need to be that complicated. Here's a simple primer on deducting your mortgage interest.
"Qualified residence interest" is deductible. But what does that mean?
Type of loan: There are generally two types of loans whose interest you can deduct under federal income tax law.
- Acquisition indebtedness: You used that loan to buy the house, make significant improvements on it or construct it. The loan must be secured by the home.
- Home equity indebtedness: It must be secured by the home and may not be greater than the fair market value of the home minus the acquisition indebtedness.
Amount of loan: The debt from the loans must be under a certain amount in order to deduct the interest.
- Acquisition indebtedness: the total amount of the acquisition indebtedness cannot be greater than $1,000,000.
- Home equity indebtedness: the total amount of the home equity indebtedness cannot exceed $100,000.
Type of home: The residence subject to the loan must be a "qualified residence." This means that it must be:
- The principal residence of the taxpayer, or
- Another residence designated by the taxpayer, and the taxpayer uses it at least two weeks in the year for personal purposes.
There are several other requirements in order to deduct mortgage interest under these allowable tax deductions.
- There must be a true debtor-creditor relationship between the taxpayer and the lender. If your dad lent you the money and really doesn't expect you to pay him back, then your interest deductions may raise some eyebrows at the IRS.
- Taxpayer must be legally liable for the loan. You might not be able to deduct interest payments under the loan if the loan is in someone else's name, even if you are making the payments.
- You itemize your deductions. If you opt for the standard deduction, you won't be able to take this deduction.
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