by Colorado Association of REALTORS® | Apr 02, 2015
As a current homeowner do I qualify for the Mortgage Interest Deduction?
Most home buyers must borrow money to purchase a home. Having housing-related tax provisions like the Mortgage Interest Deduction (MID) can help home buyers begin building their future through homeownership. While this has been a long-standing federal government tax incentive to encourage home ownership, not all homeowners qualify.
In most cases, all mortgage interest can be deducted from U.S. federal taxes provided the homeowner meets IRS requirements including: a homeowner files a Form 1040 and itemizes deductions on Schedule A; they are legally liable for the loan (you cannot deduct interest if you make a payment on someone else’s loan); and they made the payment on a qualified home.
The IRS defines a home as a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.
Of course, because the MID is regulated by the government, the rules are never quite as simple as they seem at first glance. There are two types of debt that generate tax-deductible interest. The first is debt that was taken out in order to buy, build or improve your home. This type of debt is known as “acquisition debt.” The second type is debt that was taken out for other purposes and is known as “equity debt” because it draws on the equity of your property.
You should also know that the MID can only be taken on itemized tax returns and that the interest paid on first and second mortgages is limited to a total of $1 million of mortgage debt. If you’re married and file separately, you can only deduct a total of $500,000. Interest on a home equity loan can also be deducted. That’s limited, however, to the amount of equity in your home up to a maximum loan amount of $100,000.
Your mortgage interest deduction generally declines slightly with each year you pay on your home loan. That’s because you’re paying less in interest and more in principal, with each passing year. Eventually, the total amount of your itemized deductions might not exceed the IRS-authorized standard deduction for your filing status. When that occurs, there may be little or no benefit to taking the mortgage interest deduction because the standard deduction would then be worth more to you.
While the deduction was created and exists to benefit homeowners remember that IRS rules for such deductions can be tricky. Make sure you consult with a tax attorney or certified tax preparer and read the IRS rules thoroughly before attempting to take the deduction.
Source: Colorado Association of REALTORS®