Over the last two years home prices have increased like never before. Since the Federal Reserve’s change in monetary policy interest rates have followed suit which is causing havoc for first time homebuyers.
This ever changing real estate landscape is making the tax deductibility of home mortgage interest on your tax return more important than ever.
A “mortgage” is a type of loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan.
A standard mortgage is payable over a 30 year term with the borrower paying 20% of principal as a down payment for the property at closing. Over the next 30 years equal payments are made to satisfy the loan. The dollar amount of these payments in a fixed rate mortgage remains the same but the percentage of the payment that goes towards principal and interest changes each month as the loan amount decreases. This concept is known as amortization and is important for every borrower to understand fully.
Some people might still be under the impression that all mortgage interest is still tax deductible but that is FALSE. That was the old rule, while the current rule is – only the interest on the first $750,000 of mortgage principal is deductible.
Simply put, any mortgage interest paid over and above that $750,000 principal is no longer deductible. In many areas of the country $750,000 is still enough for a new homeowner to purchase a home and not lose any deductibility. However, in so many other parts, such as New York or California many buyers will blow right past this amount.
Another vital issue to be aware of is, the mortgage loan must be a secured debt. A secured debt in the mortgage context means that the mortgage must be recorded or “perfected” under local law. For example, a loan given by someone such as your parents does not qualify, unless it is recorded as if given by a bank.
SImply put – No government recording ,NO deduction allowed.
For more affluent folks with more than two properties the rules are tightened even more. You can designate a maximum of two main homes under the tax code. If you are lucky enough to own three or more homes that are used as personal residences, only the first and second have any deductibility for mortgage interest.
If you choose to refinance an existing mortgage on a third property special rules apply that are much too detailed for this article. If you have questions about that situation send me an email to firstname.lastname@example.org and I will reply to you personally for guidance in this area.
You might be wondering where HELOC’s fall into this? A HELOC allows you as the borrower to request a line of credit from a lender based on the appraised value of your home and the equity (capital appreciation) you have in your property.
Home Equity Lines of Credit are now only deductible if the funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan. This loan and any existing mortgage debt together both fall under the $750,000 principal limitation.
For example, you used to be able to reach the $750,000 mortgage exclusion while deducting the additional interest from a $100,000 HELOC. Today that would total $850,000, regardless of lender and be above the threshold of deductibility.
Regardless of your thoughts on the mortgage interest deduction changes, these are the current rules which makes record keeping and tax planning very important. This space is ever changing in recent years so we will always keep you updated when there is news to share.
Taxation is complicated, there are exceptions and rules that go well beyond the scope of this post. For anything other than a traditional mortgage with a bank or finance company you should speak to a CPA and that is what I am here for.
To ask me any of your specific questions, send me an email with “Terry CPA” in the subject line to email@example.com I am always here to help!