Deducting From Your Taxes
One of the best justifications for owning a home is the tax saving results from deducting mortgage interest. The deduction for mortgage interest stands as one of the few remaining tax deductions for the typical middle class taxpayer. The changes to the tax code over the past several years and the repeal and limitation of many non-housing itemized deductions, mortgage interest is still deductible.
The 1986 tax reform called for consumer interest deductibility to
be phased out by 1991, interest deductions on equity indebtedness
now are limited only by the $100,000 cap. This means that interest
paid on home equity lines of credit, loans secured by principal
or second home, is still deductible.
The traditional second mortgage gives the homeowner money in one lump sum. The lender allows the homeowner to borrow at will against the equity in the home, and charges interest only on the portion of the equity borrowed against. Therefore, your interest deductions for a home equity line of credit depend on whether you borrow against the equity during that year.
The mortgage interest tax deduction is one of the best financial reasons to buy a home. You may be wondering, however, what total interest charges are like on the typical home loan.
Under the current tax code, mortgage interest on first and second
homes is generally deductible as long as these loans total less
than $1.1 million, making home ownership one of the best ways to
trim your tax bill.
Tax Benefits of Selling Your Home
The new tax code does not tax the profits from the sale of a home
if the proceeds are used to buy another house costing at least as
much as the sales price of the old one. If you or your spouse are
at least 55 years old, you may be able to sell your home and exclude
the first $125,000 of gains from your taxable income without reinvesting
the money.
Under the current tax system, there are two different kinds if debt.
Money you borrow to buy, build or substantially improve your residence
is called "acquisition indebtedness." Money you borrow
against the equity in your home, or money you take out when you
refinance your home for any reason except home improvement, is called
"equity indebtedness."
Home loans taken out before October 14, 1987, are exempted from the new rules. You may fully deduct interest paid on these loans, regardless of their size or what you used them for. Any refinanced debt you incurred before October 14, 1987, is rolled into your total acquisition indebtedness. On loans made on or after October 14, 1987, you can deduct mortgage interest paid on acquisition indebtedness up to a total of 1.0 million.
Recently, Interest rate have declined, and many homeowners have
taken advantage of this drop by refinancing their mortgages. In
the past, refinancing your mortgage has proved to be an excellent
opportunity both to lower your interest rate and monthly payment
and take equity out of your home.
When refinancing your mortgage, you will probably pay 3 percent to 6 percent of the loan amount in closing costs-for surveys, legal fees and paperwork fees. Many of these closing costs are deductible, but not necessarily in the year that you refinance. If you are considering refinancing your mortgage under the current tax rules, however, there are a couple of things to keep in mind. If you refinanced before October 14,1987, for a longer term than was remaining on the pre-October 14 loan, you may only deduct the interest paid on the mortgage for the term that was remaining on the old loan.
In the past many homeowners have refinanced mortgages on their properties to draw on their equity to buy a new car or take a vacation. Under the new tax system, homeowners will no longer have unlimited mortgage interest deductions when drawing on equity. Any equity debt incurred is subject to a limit of the amount of on equity. Any equity debt incurred is subject to a limit of the amount of the existing debt plus $100,000.
A second mortgage allows the homeowner to cash in on some of the
equity that has built up in the home over time. Some lenders call
a second mortgage a "junior lien." Getting a second mortgage
is very much like taking out your first mortgage (i.e. you w ill
be required to pay closing costs of 3 percent to 6 percent of the
loan value).
You may deduct the interest paid on second mortgages made on or after October 13,1987, up to the $100,000 limit had already been reached when the first mortgage was taken out. The amount of second mortgages made before that date is part of your acquisition indebtedness total figure.