Question:

What are the Internal revenue Service (IRS) home mortgage tax deduction rules?

Answer:

The Internal Revenue Service (IRS) home mortgage tax deduction rules are thoroughly explained in IRS Publication 936. Here is a summary of the most important home loan tax deduction guidelines regarding

  • Filing mortgage tax deductions - points, interest and Mortgage Insurance Premiums (MIPs) - on Schedule A of Form 1040;
  • Home mortgage tax deductibility limits;
  • How to get professional tax help for little or no charge.

The General Home Mortgage Tax Deduction Rule

Mortgage loan interest is what you pay to a lender for getting a home loan to purchase or improve a primary or second home. Home mortgage interest can be deducted from your taxable income for first or second mortgage, home equity loan (HEL) or line of credit (HELOC).

The interest will be deductible on a secured loan made on a qualified property that you own; you must be legally liable for repaying the home loan. A secured mortgage is one using your home as collateral for the loan. A borrower may opt to treat certain loans as not secured by their home, especially if they could qualify for greater loan interest tax deductions under different IRS rules.

Most homeowners qualify for full deduction of mortgage interest.

Below follow three mortgage loan categories and if your loan fits entirely in any of it, you can deduct all mortgage interest.

  • If your mortgage was taken before October 13, 1987 it is considered grandfathered debt and all interest paid on it is fully tax-deductible;
  • Your combined home acquisition debt (that is, mortgage loan taken to build, buy or improve a house) does not exceed $1M for joint filers; and $500,000 for individuals. Combined home acquisition debt would include any grandfathered debt (if any), plus any first or second mortgage or home equity loan or line of credit taken after October 13, 1987 and throughout 2007 for the abovementioned purpose.
  • Home mortgage interest is also fully tax deductible on home equity debt of up to $100,000 for joint filers ($50,000 for individuals) used for any purpose. Your house market value has to be equal to or exceed your combined mortgage indebtedness.
    • Roughly speaking, if you have a house worth $450,000 and you have a first and second mortgage totaling $400,000 and you take out a HELOC of $70,000, interest will be deductible on the first $50,000 on it.
    • If on the same house your acquisition debt was paid down to $200,000 you could take a HELOC of $150,000 but the interest would be deductible only on the first $100,000 of it.
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