The mortgage interest tax deduction

by Adam Krause, Contributor

If you are a homeowner who has taken out a mortgage loan to pay for your home, you can receive tax help by deducting the home mortgage interest you pay on your loan. It’s important to understand this tax deduction as it can help lower your taxable income.

To take advantage of the mortgage interest tax help, you will need to itemize your deductions on IRS Tax Form 1040 (U.S. Individual Income Tax Return). Fill out Schedule A to determine whether your itemized deductions exceed your standard deduction. If they do, you will probably get more tax help by itemizing with the 1040 Form (rather than taking the standard deduction).

The mortgage interest you are deducting must be for a secured debt on a qualified home, either your main home or your second home. You must also be legally liable for the loan. Make sure to have your HUD-1 Settlement Statement ready, as it will be a big tax help.

The mortgage interest deduction you claim for tax help should match the amount on your Form 1098 (Mortgage Interest Statement). Your mortgage lender will send a copy of this form to the IRS, so you will not need to include it with your tax return in order to receive tax help.

You can deduct the interest paid for up to $1,000,000 of home acquisition debt on your primary and secondary residences combined. Home acquisition debt is a mortgage taken for the purpose of acquiring, constructing, or substantially improving a home.

However, if you deduct interest on construction loans for two years and then sell the property rather than continuing to use it as a residence, you may have to recharacterize the construction interest as “investment interest.” Note that investment interest is subject to different IRS rules and you might have to repay some of the money.

For interest on home equity debt not used to improve your home, the maximum debt amount you can deduct on is $100,000. If you are married and filing separately, this maximum is reduced even further, to $50,000. In general, home equity debt is not as much of a tax help as home acquisition debt.

Even if you refinance your home loan, the interest generated by the new mortgage remains tax deductible, as long as this refinancing is done without taking on additional debt.

As for vacation homes, you may only deduct the interest from one second home and it must be a property that you use at least 14 days during the year. If it is a rental property, you must use it more than 10% of the time that you rent it out. It must also have sleeping, cooking, and restroom facilities. If you are a homeowner with more than two homes, consult your accountant or a tax professional for additional tax help.