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Mortgage Interest Deductions
Published: 05/07/2011 by Kristie Lorette
Mortgage Interest Deductions: Truths and Myths on What’s (and what’s not) Tax Deductible
For the majority of Americans that own homes, their home is one of their biggest tax deductions. Taxes are confusing enough as it is. So, when you add your house in the mix, it can muddy the waters on the items that you can and cannot legally deduct from your taxes. Rather than remain in a state of confusion, uncover the truths on the items that are and are not tax deductible in conjunction with your home.
Mortgage Points Are Deductible
It is true that you can deduct the points you pay on a mortgage for a purchase or for building a home. There are, of course, some criteria that you must meet and some limitations on deducting the points from your federal tax returns. First, the mortgage you pay the points on must be for a mortgage on your primary residence. You also have to deduct or write off the points in the tax year in which you paid the points. You can only deduct all of the points if the total mortgage amount on the home is less than $1 million. Finally, to deduct the points, you have to itemize the deductions on your tax returns rather than take the standard deduction.
Home Businesses Are Not Tax Deductible
This is false for the most part. If you run a home business, you can deduct a portion of your housing expenses from your federal tax returns. These deductions include a portion of your mortgage interest and even your real estate taxes. These deductions are in addition to other allowable expenses, such as a portion of your utilities and insurance. You do have to have a dedicated space or area in your home that is the primary location of your home business. This may include a spare bedroom, attic space or basement that you have turned into your office. The amount you can deduct is in proportion to the square footage of the room or area where you run the business.
Home Equity Loans/Lines Are Not Tax Deductible
Generally, a home equity line of credit or loan is a second mortgage on a home. These types of mortgages are still tax deductible, if it is on the primary residence. Typically, any interest that you pay on the home equity loan or line is tax deductible, up to a maximum of $100,000. If the homeowners are married or filing separately then the cap on interest is cut in half and only applies to first the $50,000 in interest.
The interest that you pay on your home mortgage may be fully tax deductible. In addition to mortgage interest, you may also be able to deduct points you pay on establishing a mortgage to buy a home. Each individual tax situation is different but between the IRS website and publications and your accountant or CPA, you should be able to identify precisely what you can write off as it pertains to your home and your mortgage, in order to maximize your tax deductions.
