The mortgage interest is one of the most commonly utilized tax breaks under Internal Revenue Code by an Individual. In fact , most individual who takes loan for buying home , has to deal with the concept of mortgaging the home against the loan .Section 163(h) of the US Code 26 deals with interest deduction . This post is answering some of the frequently asked questions on home loan interest deduction while computing taxable income of the year to clear the air around how does mortgage interest deduction work.
1.What is mortgage interest for tax purpose?
Mortgage interest is nothing but the interest you pay or accrue against you on a loan secured by a main home or second home. If the loan is not secured against the home , such loan is considered personal loan and shall not be counted for tax deduction part. Some of the type of loan that is considered as mortgage loan are :
- A mortgage to buy your home
- A home equity loan
- A second mortgage
- A line of credit
You can deduct interest on mortgage by securing on first or second home only . You can’t deduct interest on a mortgage for a third home, a fourth home, etc. As far as the second home is concerned, you can deduct interest on mortgage of second home only if the requirements of IRC §280A(d)(1) that which is 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
(1) loans taken for purchase an existing property, or improving an existing house or for new construction or
(2) loan for any other purpose like buying furniture or other assets for house . But the loan must be secured by the residence. Please refer IRC §163(h)(3)(A), (B) and (C).
2. Is the home must be only a house ?
Not necessarily. Well , generally the home means a house , but for the purpose of interest deduction under section 163 of US Code 26 , the meaning of home includes house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.
3. Who can claim tax deduction for interest ?
Only the individual who borrows the loan and obligated to pay the debt can claim deduction of mortgage interest . However if you our 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.
4. What is the maximum mortgage interest deduction?
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) .
5. Can I deduct Interest on refinanced mortgage?
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 .
6. Do I need to maintain records ?
The documents to authenticate your claim is required if your case selected for the IRS scrutiny .It is is better you keep following documents safely :
- Copies of Form 1098: that is given by the lender if you purchased your home in the current year, any deductible points you paid.
- Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
- 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
- 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