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Tax Tips
The Limits of Mortgage Interest Deductions - April 2008
Richard Scrivanich - Partner
You probably believe that mortgage interest payments are deductible; however, this is only true when it is up to tax-code limits.
There are two types of debt that can generate home-loan deductions:
Acquisition debt: This term refers to debt that was incurred to buy, build, or improve a home. You can borrow up to $1 million for such purposes, and deduct the interest you pay.
Home equity debt: These loans are also secured by a home, but not necessarily to buy, build, or improve it. For home equity loans, debt up $100,000 will yield deductible interest.
Debt as determining factor
Keep in mind that the $1 million and $100,000 totals refer to the amounts you have borrowed – they do not refer to home equity, or to the amount of interest you pay.
Suppose you borrow $200,000 on a home equity line of credit. At an 8% interest rate, you pay $16,000 in interest this year; however, only the interest on $100,000 worth of home equity debt is deductible, which is $8,000 for the year.
Good new, bad news
The interest on $100,000 worth of home equity debt is deductible, no matter how the money is used. You might, for example, use such a loan to pay off credit card debt, which does not generate tax-deductible interest and, which usually, has a higher interest rate.
There is a further limit; you can only deduct interest on a home equity loan to the extent that you have home equity. If your home is worth $300,000 and acquisition debt is $250,000, you can only deduct interest on $50,000 worth of home equity debt.
Moreover, home equity debt is secured by a home. Remember that you could lose the home if you fail to make payments. Be sure that your ability to repay the loan is certain before putting your family home on the line.
Double domiciles
The $1 million and $100,000 amounts for acquisition and home equity debt are aggregate totals. They can be applied to one or two residences.
A “home,” for the purpose of taking these interest deductions, can be any property with sleeping accommodations, a toilet, and cooking facilities; thus, you may be able to get deductions for loans secured by a mobile home, a recreational vehicle, or a boat, as long as those three tests are passed.
If you have any questions regarding the above discussed topic, or any other tax matter, please feel free to give me a call at (562) 698-9891.
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All rights reserved. For personal use only.
Do not duplicate or distribute without permission. All information in this
article is for informational purposes only.
Some of the articles included here were written in a prior
year or before a current tax law change. Therefore some of the information in
the older articles may not still be valid. Any dollar thresholds indicated
relate only to the year for which the article was written and could be different
for the current year. Please discuss with us your personal situation before
acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
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