Helping With Your Deductions

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 December 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) are often funding sources 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 investment properties are treated differently. Don’t forget, equity lines & equity loans are secured as a 2nd mortgage against your home. Interest from both your principal and 2nd home mortgages can usually be deducted. You don’t have to use the 2nd 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 mortgage might be “wrapped.” In this case the buyer pays the seller and the seller continues to pay their mortgage. Lenders are supposed to be notified when a mortgage is 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 non-conventional mortgages, are usually deductible. Active duty soldiers receive a non-taxable housing allowance, but 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 is no longer deductible. Certainly, every situation is different so be sure to research Pub 936 and consult your tax advisor. For most of us, our home ownership 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!