While mortgage debt is one of the biggest expenses for the nearly 90 million American households living in houses they own, it also has some tax benefits. Here is some information on mortgage interest deductions.
To begin with, you must be the primary borrower on the mortgage to qualify. The deduction only applies if you’re paying interest on a house, condo, mobile home, RV, boat or anything that has sleeping, cooking and toilet facilities and your mortgage must be secured by your main home or your second home. It will not apply for a third or fourth home or if your second home is used as a rental home unless you also use it as a residence for at least 15 days of the year.
So what is considered a mortgage income deduction? Here is a list of the most common deductions and some additional ones that may also apply to you.
Main types of deductions:
– Mortgage Interest – You can deduct the interest portion of your monthly mortgage payments each year until the interest is less than the principle up to $1 million or $500,000 if you are married and file separately.
– Home Equity Loan – You are allowed up to $100,000 on your home equity debt.
– Property Taxes – State and local taxes paid on real estate are also eligible for deductions. Keep in mind that for the first year of ownership, you can only deduct the taxes for the portion of the year you owned the home, as the seller is eligible for the rest of the deduction.
– Mortgage Insurance – Any premiums paid for private mortgage insurance that are required by your lender are considered deductible mortgage income. It’s important to note that this is set to expire at the end of this year unless renewed by Congress so please make sure to do your research before considering this as a deduction in the future.
– Any home improvements made that are required for medical care are also eligible for deduction.
– Mortgage points paid the year you sign your mortgage or refinance are an additional deduction. These are also known as Loan Origination Fees or Discount Points. Each point equals 1% of your loan amount and can substantially increase your deduction depending on how large your loan is.
If you have recently refinanced your mortgage, you are still eligible for deductions. Just bear in mind that the balance of your new mortgage (up to the balance of your old mortgage) is considered mortgage acquisition debt and anything more than your old balance is treated as home equity debt.
It’s just as crucial to be aware of the things you cannot deduct. Here are a few of those things:
– HOA dues
– Appraisal fees
– Cost of improvements to your home (unless they qualify as a medical expense as noted above)
– Legal and recording fees
– Any settlement fees
It’s important to know the ins and outs of mortgages and taxes in order to benefit from the deductions that are made available to you. The good news this year is that we have three extra days to file. Make sure you keep thorough records that document the interest you have paid and good luck!
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