Owning a home is one of the biggest tax breaks Americans receive. There are 86 million households in the United States. The majority of those households carry some sort of mortgage debt totaling more than $9 trillion. That’s one heck of a write off.
Types of deductible mortgage debt
Deducting the interest paid on a home loan is probably the biggest tax break most Americans receive. There are two types of deductible mortgage debt recognized by the IRS: Primary mortgage debt – the debt incurred when buying, building or substantially remodeling your home – and secondary mortgage debt, such as home equity lines of credit.
The IRS allows homeowners to write off the interest paid on primary home loans with balance of up to $1 million, except for those who file single returns, in which the limit is $500,000. On the other hand, the limits on home equity debt are much lower. If you borrow money against your home and use it for anything other than substantially improving your home, including debt consolidation, the IRS will consider it a secondary mortgage for tax purposes.
Homeowners can only write off the interest on home equity loans with balances of up to $100,000. Also, and maybe most importantly, the home equity debt, combined with the primary mortgage, cannot exceed the fair market value of the home. Refinancing a mortgage does not change its nature for tax purposes. Call (888) 983-3240 for more information.
What exactly is deductible?
I might seem pretty straight forward that homeowners are allowed to deduct the amount of their monthly payment that goes toward interest, but the deductions don’t stop there. Homeowners can often deduct points paid when you first get a mortgage. Paying points is a strategy some homeowners use to reduce their overall interest rates. There are pros and cons to paying points.
Private mortgage insurance, which is required when you put less than 20 percent down on a home, is also deductible. However, this provision is slated to expire at the end of 2016.
Many mortgage companies require that property tax and insurance payments be collected monthly with your mortgage payment. These funds are deposited into an impound account to insure the taxes are paid and the home in properly insured. In some cases, these tax and insurance payments are also deductible.
Homeownership is the goal of many Americans, and these tax deductions just make the dream that much sweeter. Knowing the ins and outs of mortgage tax deductions can save you thousands of dollars a year in taxes and it’s important that you take full advantage of the tax benefits.Call (888) 983-3240 for more information.
Published March 23, 2016
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