Deducting Your Mortgage Interest Under the Tax Code One of the best
justifications for owning a home, at least for financial reasons, is the tax savings that result from deducting mortgage interest. The deduction for mortgage interest stands as one of the few remaining tax deductions for the
typical middle class taxpayer. Despite the changes to the tax code over the past several years and the repeal and limitation of many non-housing itemized deductions, mortgage interest is still deductible. On first and second
mortgages and home equity lines of credit (with some limitations) for first and second homes, your mortgage interest deduction is still a good financial incentive to buy a home.
Your Mortgage Interest Deductions Homeowner Profile
According to the tax code, this homeowner's deductions for mortgage interest and property taxes would be evaluated at a 15 percent marginal tax rate. Non-housing itemized deductions (i.e., state and local taxes,
non-mortgage interest and so on) is estimated at $2,000 and the standard deduction is $5,450. Under the current tax system, the homeowner saves $1,071 because of the mortgage interest deduction. You can figure what your own
costs and savings will be by substituting your own tax figures for those on the chart. Example of the impact of the Mortgage Income Tax Deduction on Annual Homeownership Costs: Before-Tax Homeownership Costs
Total of Before-Tax Homeownership Costs=10,592 Itemized Deductions
Standard Deductions=5,450 Total Itemized Deductions=$7,142 Multiply Total Itemized Deductions by Marginal Tax Rate to get Homeownership Tax Savings:
After Tax Homeownership Costs = Homeownership Tax - Before Tax Savings: $10,592 - 1,071 = $9,521
Two Kinds of Debt
When you borrowed the money is also important. Home loans taken out before October 14, 1987, are exempted from the new rules. You may fully deduct interest paid on these loans, regardless of their size or what you used them for.
Any refinanced debt you incurred before October 14, 1987, is rolled into your total acquisition indebtedness. On loans made on or after October 14, 1987, you can deduct mortgage interest paid on acquisition indebtedness up to a
total of 1.0 million. This means you could buy a home for $250,000, a beach home for $200,000, and add a family room to your first house for another $100,000, and still have $450,000 to spend on these homes for further
improvements before you reached your limit for interest deductibility. The $1. 0 million is not cumulative. As you pay off a loan, you would add that amount to your total purchasing or improving up to two residences.
Your equity indebtedness limit is $100,000. That means that you can borrow up to $100,000 of the equity in your home and use it for whatever you want. This is a change from the pre-1986 tax rule that limited your equity
borrowing beyond the purchase price to certain qualified expenses, such as home improvements, medical and education expenses. Refinancing Your Mortgage When refinancing your mortgage, you will probably pay 3 percent to 6 percent of the loan amount in closing costs-for
surveys, legal fees and paperwork fees. Many of these closing costs are deductible, but not necessarily in the year
that you refinance. If you are considering refinancing your mortgage under the current tax rules, however, there are
a couple of things to bear in mind. If you refinanced before October 14,1987, for a longer term than was remaining on
the pre-October 14 loan, you may only de duct the interest paid on the mortgage for the term that was remaining on the old loan. So if you refinanced a loan with 15 years remaining for a 30-year loan with lower payments, you can
only deduct the mortgage interest paid on the new loan for 15 year s. The one exception is if you had a balloon mortgage payment come due after October 13,1987 and you refinanced it to a loan of not more than 30 years; you
get the deductibility for the full term of the longer loan. Any refinanced debt you incurred before October 14,1987, is rolled into your total acquisition indebtedness.
In the past many homeowners have refinanced mortgages on their appreciating properties to draw on their equity to buy a new car or take a vacation. Under the new tax system, homeowners will no longer have unlimited mortgage
interest deductions when drawing on equity. Any equity debt incurred is subject to a limit of the amount of on equity.
Any equity debt incurred is subject to a limit of the amount of the existing debt plus $100,000. Say, for instance, that you bought your house 10 years ago and have seen the property grow in value from $70,000 to $230,000. If you
refinance your mortgage (on which you now owe $50,000), you may only deduct the interest paid on the total of your acquisition indebtedness in the property ($50,000) plus $100,000. You will be able to deduct the interest paid on
$150,000. Second Mortgages You may deduct the interest paid on second mortgages made on or after October 13,1987, up to the $100,000 limit
had already been reached when the first mortgage was taken out. The amount of second mortgages made before that date is part of your acquisition indebtedness total figure. This means that if you had $50,000 left on your first
mortgage as of that date, and had taken out a $25,000 second mortgage on the property prior to October 14,1987, you would have an acquisition indebtedness of $75,000. Home Equity Lines of Credit
Where the traditional second mortgage gives the homeowner money in one lump sum the home equity line of credit allows homeowners to use the equity in their home like a giant credit card. The lender allows the homeowner to
borrow at will against the equity in the home, and charges interest only on the portion of the equity borrowed against. Therefore, your interest deductions for a home equity line of credit depend on whether you borrow against
the equity during that year. Loan Type Varies Interest Deduction $75,000 MORTGAGE
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