7 FAQs on Mortgage Interest Deduction while Computing Taxable Income

The mortgage interest deduction is one of the most commonly utilized tax relief under 26 US Code ( i.e Internal Revenue Code) by an Individual.  Section 163(h) of the Internal Revenue Code  deals with law about exclusion of home loan interest expense . Here are the answers of seven questions that will clarify if you can deduct the interest on home loan from your taxable income .

1. Is the mortgage deduction available if I opted for standard deduction ?

The answer is a definite No . After the Tax Cuts and Jobs Act , a taxpayer can deduct the interest, if he/she itemizes their deductions while computing their income tax liability. But , if you itemize the deductions , you can not claim standard deduction. So, most important aspect is to consider whether itemized deductions that include the mortgage interest is more than the standard deduction

2.What is counted as mortgage interest ?

Only the loan that is secured against the home is considered personal loan and shall not be counted for tax deduction part. Some examples of mortgage loan are :

  • A mortgage to buy a house for yourself
  • A home equity loan
  • A second mortgage

Mortgage Should not be on 3rd Home!

You can not deduct interest on a mortgage for a third home, a fourth home, etc because the deduction is restricted up to second home mortgage only . Even for the mortgage on second home , interest is deductible only if  the requirements of IRC §280A(d)(1) is satisfied . The requirement is that the second home must be used for personal purposes for

  • at least 14 days per year or
  • 10% of the number of days it is rented during the course of a year.

Allowable mortgage interest is one that relates to either

  • loans taken for purchase an existing house, or improving an existing home or for the new construction of house or
  • loan for any other purpose like buying furniture or other assets for house . But the loan must be secured by the residence. 

3. What is the meaning of house ?

The meaning of house for the purpose of deduction of home loan interest under section 163 of Internal Revenue Code. includes house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities

4. Who can claim exclusion for home loan interest ?

Only the individual who borrows the loan and obligated to pay the debt can claim deduction of mortgage interest . However if you or your spouse jointly took loan , then both of you can claim the deduction for interest.  Readers should also note the  Treas. Reg. Sec. 1.163-1(b), that mortgage interest that is paid by a taxpayer who is the (legal or equitable) owner of the property is deductible, even if that taxpayer is not directly liable on the bond or note that is secured by the mortgage.

5. What is the maximum deduction allowed?

The aggregate mortgage interest that you can deduct is $1 million($500,000 if you use married filing separately status). Apart from that you can also deduct interest on home equity debt of up to $100,000 ($50,000 if you’re married and file separately) .

6. What about interest on mortgage refinance?

The answer is a definite Yes .

  • On refinancing the old mortgage , the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage.
  • The unused balance of the the old mortgage balance not used to buy, build, or substantially improve your home might qualify as home equity debt.
  • The home equity debt provision ( refer section 163(h)(3)c) of IRC provides that interest on up to $100,000 of that excess debt may also be deductible .

7. Do you need to maintain records to prove claim of deduction?

For filing taxes, you computed on some basis , Right ? So , those documents may be required required if your case selected for the IRS Audit or scrutiny .It is is better you keep following documents safely :

  1. Copies of Form 1098: that is given by the lender if you purchased your home in the current year, any deductible points you paid.
  2. Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
  3. The identity details of the person from whom you bought house. So his/her personal details like name, Social Security number and address should be maintained. IRS may require it for verification
  4. IRS will also verify if you’re deducting the eligible portion of your interest over the life of your mortgage in case of refinancing of the mortgage. So past return copies should be maintained. Although IRS has those returns, but is more for ready reference

Refer  IRS Publication 936: Home Mortgage .

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