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Mortgage Tax Deduction

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In addition to the numerous other benefits of home ownership, the mortgage tax deduction can make it more financially appealing to own a home. People often assume that if you own a home – or multiple homes – you can automatically write off the interest you pay on your tax return. This is not the case. Before you prepare your taxes this year, it’s smart to understand in what situations you can write off your interest and when you should avoid doing so.

Mortgage Tax Deduction Types

The mortgage tax deduction beloved by so many homeowners actually comes in two different forms:

  • Acquisition debt
  • Equity debt.

Acquisition debt is simply the money you pay to acquire or construct a primary or secondary residence. As this is the purpose of most new and refinance home mortgages, this interest may be tax deductible. Loans to substantially improve the home – like a home improvement loan to build a new room over the garage – also count as acquisition debt.

Equity debt involves pulling money out of your first or second home for purposes other than the acquisition, construction or improvement of the home. For example, taking out a home equity loan to buy a new car or pay off credit card debt counts as equity debt. In the eyes of the IRS, home equity loans and lines of credit are the same thing with regards to the mortgage tax deduction

Qualifying for the Mortgage Tax Deduction

In order to qualify for the home mortgage tax deduction, you must itemize your taxes. This means you get no tax benefit from the interest you pay on your mortgage when your itemized deductions do not exceed the standard allowed deduction. If you own a home, it’s to your benefit to conduct tax planning each year to ensure you are able to itemize deductions for your tax return.

The itemization requirement is not all you must fulfill in order to claim the mortgage tax deduction. You must also:

  • Be legally liable for the loan
  • Make a payment to the loan
  • Not write off interest on acquisition debt in excess of $1,000,000
  • Not write off interest on equity debt in excess of $100,000.

Unfortunately, when you rent or lease a home, you do not meet the home mortgage tax deduction requirements to write off the interest expense on your tax return. This is because your landlord is the person with legal responsibility to pay the mortgage obligation, not you. Even when every penny of your rent goes towards the landlord’s mortgage payment, you may not claim it on your tax return.

Remember, it’s okay to have acquisition or equity debt in excess of the above limits. Having large loans doesn’t negate your ability to claim the mortgage tax deduction. You just have to remember not to write off the interest on the portion of the loan in excess of the limits.

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