Taxes don’t interest people, but tax deductions do. Tax deduction means that you can deduct a certain amount from your annual payable tax, based on certain conditions. Homeowners availing mortgage service have the privilege of tax deductions. After you calculate mortgage interest, you’ll know if you’re eligible for it.
Homebuyers can get a tax incentive till they itemize. The Internal Revenue Service allows this. There are several advantages of this deduction. Many homeowners opt for mortgage because it makes home owning much more affordable than renting one.
Eligibility for Tax Deduction
Homeowners must meet certain requirements to become eligible for a home mortgage interest tax deduction.
Homeowners must file an IRS form 1040 as well as itemize their deductions.
The mortgage is a secured debt on a qualified home of the homeowner.
What Falls Under Mortgage Interest?
IRS publication 936 enlists all the details, some of which we will mention:
Main home: You can have only one main home at a time. It can be a house, an apartment, a boathouse, or a mobile home. Additionally, it should have a basic booking, toilet as well as sleeping facilities.
The Second home: The home which you treat as your second home.
Second-home not rented: You can decide to not rent your second home during the whole year.
Second-home rented out: To treat the second home as a qualified home, you must use it as a home during a part of the year even if you rent it for the other part. You have to stay at least 14 days or greater than 10% of the number of days you rented it out.
What Doesn’t Fall Under Mortgage Interest?
The following don’t fall under mortgage interest:
- Title insurance
- Settlement costs
- Homeowners insurance
- Interest on a reverse mortgage
Tax Deductions Under the Limit
The limit on mortgage interest deductions has been lowered after the Tax Cuts and Jobs Act. Before Dec 15, 2017, the mortgage interest deduction limit was $1 million. Homeowners who purchased or refinanced homes after December 15, 2017, can only deduct up to $750,000 of interest. The taxpayers may be single or married who filed jointly. The limit is now $375,000 each for married couples who file taxes separately.
Grandfathered debt: If you took out a mortgage before October 13, 1987, the full interest is deductible.
Home acquisition debt: If someone took out a mortgage to purchase or build or improve a home by utilizing either his primary or second mortgage between October 13, 1987, and December 16, 2017, he can deduct up to $1 million (or $500,000 for married couples filing taxes separately).
Calculation Of Tax Deduction
If you cross the limit, you need to calculate the amount of interest you can deduct. You can deduct the part of your interest paid on the amount of debt below the limit. Follow the mentioned steps to calculate mortgage interest deduction limit:
Divide the maximum debt limit by your mortgage balance. For example, if your mortgage is $1.50 million. Since the limit is $750,000, divide $750,000 by $1.50 million. You will get 0.5.
Multiply the result by the interest paid to calculate your deduction. Suppose, if you paid $50,000 in interest for the year, multiply $50,000 by 0.5. Thus, you can deduct $25,000.