When the Federal Tax Code was introduced in 1913, all interest was deductible. At that particular time, not very many Americans had home mortgages. In 1986, when Congress completely overhauled the tax code, it eliminated the interest deduction for most consumer debt, but kept the deduction for mortgage interest. In 1987, Congress limited the deduction on home mortgage interest to $1 million in mortgage debt on a first or second home. In the same year, they created the home-equity deduction that allows homeowners to deduct interest on up to $100,000.00 in mortgage debt for purposes other than buying, building or improving a home.
To claim this deduction you must itemize your deductions. In 2012, the standard deduction for married filing joint is $11,900.00 and $5,950.00 for those filing single. If your itemized deductions are in excess of this amount, then it is better for you to itemize than it would be to take the standard deduction.
Home equity debt is a secured loan that utilizes the home as collateral. The loan that is given is based on the equity in your home and can be used for many different purposes. As I mentioned before, home equity loans are tax deductible under some circumstances.
The Internal Revenue Service allows for an interest loan deduction for each tax year. As I mentioned earlier the interest deduction is limited to the first $1 million of debt. The home mortgage interest deduction is very specific in that you must use the funds for home improvement, or building in respect to a first or second home.
The criticism of this deduction is that it primarily subsidizes wealthy people living in expensive homes. As a consequence, some in Washington have kicked around the idea of eliminating this tax deduction. This deduction was on the table in the recent “Fiscal Cliff” negotiations, but ended up remaining intact. For now, the deduction is safe.
Typically the interest that you pay on your mortgage is deductible under certain circumstances. There are limitations on the amount that you can deduct. The limitations include the following
- Acquisition Debt – You may not deduct interest on more than $1 million of home acquisition debt for your main home and second residence. Home acquisition debt means any loan whose purpose is to acquire, to construct, or substantially improve a qualified home.
- Home Equity Debt – You may not deduct interest on more than $100,000.00 of home equity debt for your main home or secondary residence. Home equity debt is defined as any loan whose purpose is not to acquire, to construct, or substantially improve a home.
- Home Construction Loans – you may deduct interest on mortgages used to pay construction expenses. The proceeds must be used to acquire the land and for construction of the home. Expenses incurred in 24 months before the construction was completed counts toward the $1 million limit on home acquisition debt.
- Points – Points paid on acquisition debt for primary and secondary residences are fully deductible.
The home mortgage interest deduction is probably the best deduction that you have as a home owner.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, and The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle
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