About this time of year, most of us are nervously contemplating April 15th. Here are a few reminders courtesy of my excellent tax preparer and IRS publication 936, which explains mortgage deductions. The rule of thumb is that interest from a first mortgage is fully deductible as long as your mortgage balances don’t exceed $750K unless you purchased before Dec 16, 2017, then $1 million (for married couples).
Equity lines are powerful tools for investors wanting to take advantage of opportunities in today’s market. With the limited availability of land loans, this (and seller financing) may become a principal funding source for vacant parcels. Ads encouraging homeowners to tap the equity in their principal residence always have the caveat that interest “may” be deductible. Interest on equity loans, equity lines and cash out refinances is now only deductible if you use the money to buy, build or improve your home. Interest deductions for monies used to purchase rental properties or for business investments are treated differently.
Don’t forget, equity lines and equity loans are secured with a second mortgage against your home. Interest from both your principal and second home mortgages can usually be deducted. You don’t have to use the second home during the year as long as it’s not rented. If rented, a certain amount of personal use is required. Be sure to ask your tax advisor or study the IRS publication before assuming interest is deductible. Points on a purchase are deductible. Points paid on a refinance are pro-rated over the life of the mortgage.
In creative financing, a property may be sold by “wrapping” the underlying mortgage. In this case the buyer pays the seller and the seller continues to pay his mortgage. The seller’s lender is supposed to be notified when a mortgage is being wrapped. Because this is an encumbrance on title, the lender could accelerate (call) the mortgage so at times, buyers and sellers do not record the agreement. In this case, the interest would not be deductible. Pre-payment penalty payments, common on sub-prime or finance company mortgages, are usually deductible. Even though active duty soldiers receive a non-taxable housing allowance, their mortgage interest is still deductible. Mortgage Insurance premiums are almost always required on purchases with less than 20% down. Sadly, the deduction of mortgage insurance recently expired. Certainly, every situation is different so be sure to research Pub 936 and consult your tax advisor. For most of us, our homeownership deduction is likely the closest thing to an economic stimulus we’ll ever see, especially at tax time. Don’t own a home? Hmmm…bet I know how to fix that!
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