What is Mortgage Interest Deduction?
One of the most significant tax incentives to homeowners is the mortgage interest deduction. According to Investopedia, this deduction allows homeowners to take the mortgage interest they paid throughout the year and subtract it from their taxable income, resulting in a lower tax bill or a larger refund.
However, like many tax benefits, there are limits and qualifications to be aware of before claiming this deduction according to Rocket Mortgage. For instance, the mortgage interest deduction is only available to taxpayers who itemize their deductions, meaning they must forego the standard deduction in claiming individual deductions.
Tax Rules on Mortgage Interest Deduction
The tax rules surrounding the mortgage interest deduction have also changed in recent years. In 2017, the Tax Cuts and Jobs Act (TCJA) reduced the mortgage interest deduction limit for new loans taken out after December 15, 2017. Before the TCJA, the deduction limit sets at $1 million, but now it is capped at $750,000.
It’s important to note that not all loans are subject to the $750,000 limit. Any mortgages taken out before October 13, 1987, are considered grandfathered debt and are not subject to any limit. Homes purchased between October 13, 1987, and December 15, 2017, are still eligible for the $1 million limit, and sold before April 1, 2018, are also qualified for the $1 million limit if there was a binding contract entered, before December 15, 2017, and the house was purchased before April 1, 2018.
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It’s also worth noting that the mortgage interest deduction can be taken on loans for second homes as long as they stay within the IRS limits. It means that homeowners can deduct mortgage interest paid on loans for vacation homes or rental properties, provided the total loan amount does not exceed the limits set by the IRS.
So what types of loans qualify for the mortgage interest deduction?
The most common types are loans to buy, build, or improve a primary residence. Home equity loans, home equity lines of credit, and second mortgages can also qualify, but only if they are used to improve the primary residence. Refinanced loans can also be eligible for the deduction, but only if the loan was used to buy, build, or improve the home and the home secures the loan.
Finally, it’s important to understand what counts as deductible mortgage interest. Typically, any interest paid on loans secured by a primary residence or second home may be deductible. It can include not only the interest paid on the original mortgage but also interest on home equity loans, home equity lines of credit, and second mortgages. However, it’s crucial to consult with a financial advisor or tax professional to determine which payments qualify for the deduction and to ensure that all necessary qualifications are met before claiming the mortgage interest deduction on your tax return.
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