Our house in the middle of our street ...
Hopefully your house is in a better location than the one in this song. But no matter where it is, owning a home may generate a tax break. Though you’ll have to itemize to claim the benefit, interest you pay on your main residence’s mortgage can reduce your taxable income. In some cases, mortgage interest on a second home is also deductible.
Here’s how it works.
Generally, you can deduct all the interest you pay on mortgages you take out to buy your home as long as total loans are less than $1,000,000. The IRS calls this acquisition indebtedness, and it includes financing you obtained to buy, build, or improve your home.
Note: The $1,000,000 limit includes all acquisition debt for both your primary residence and a second home.
Did you tap the equity in your home? Interest is deductible on a home-equity loan of $100,000 or less no matter how you use the money. However, the deduction may be limited if total mortgage debt exceeds your home’s value.
Caution: Unless you use home-equity loan proceeds to buy, build, or improve your home, interest you pay is generally not deductible under the alternative minimum tax rules.
Late payment fees, prepayment penalties, and certain points are also deductible as interest expense. Please contact us if you need details or more information about tax issues related to home ownership.
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