Mortgage Interest Deductions
Most home buyers must borrow money to purchase a home. Housing-related tax provisions like the Mortgage Interest Deduction (MID) can help home buyers begin building their future through home ownership. While this has been a long-standing federal government tax incentive to encourage home ownership, not all homeowners qualify.
Mortgage interest is deducted from U.S. federal taxes provided the homeowner meets IRS requirements. These can include a homeowner who files a Form 1040 and itemizes deductions on Schedule A; they are legally liable for the loan (you cannot deduct interest if you make a payment on someone else’s loan); and they made the payment on a qualified home.
The IRS defines a home as a house, condominium, cooperative, mobile home, boat, recreational vehicle, or similar property that has sleeping, cooking, and toilet facilities.
The government regulates mortgage interest deductions. The rules are never quite as simple as they seem at first glance. There are two types of debt that generate tax-deductible interest. The first is debt is taking out a loan to buy, build, or improve your home (acquisition debt.) The second is when you borrow for other purposes (equity debt), which draws on the equity of your property.
The first type is acquisition debt, where you take out a loan to buy, build, or improve your home. The second type is equity debt, where you borrow against the equity in your property for other purposes.
Your mortgage interest deduction generally declines slightly with each year you pay on your home loan. That’s because you’re paying less in interest and more in principle with each passing year. Eventually, the total amount of your itemized deductions might not exceed the IRS-authorized standard deduction for your filing status. When that occurs, there may be little or no benefit to taking the mortgage interest deduction because the standard deduction would then be worth more to you.
A deduction is created and exists to benefit homeowners; IRS rules for such deductions can be tricky. Make sure you consult with a tax attorney or certified tax preparer and read the IRS rules thoroughly before attempting to take the deduction.
