However, you're not going to get to deduct
all that interest. Instead, your deduction is limited
to interest on just $15,000 of the loan; that's the
amount your home's value exceeds your first mortgage.
Interest payments on the other $27,500 are not deductible,
even though the equity line is secured by your home.
So don't automatically assume you can deduct all interest
on home equity debts.
What if your real
estate circumstances are a bit
brighter? Say, for instance,
you're able to swing a vacation
home on the lake. You're
in tax luck. The mortgage interest
on a second home is fully deductible.
In fact, your additional property
doesn't have to strictly be
a house. It could be a boat
or RV, as long as it has cooking,
sleeping and bathroom facilities.
You can even rent out your second
property for part of the year
and still take full advantage
of the mortgage interest deduction
as long as you also spend some
time there.
But be careful. If you don't vacation
at least 14 days at your second property, or more than
10 percent of the number of days that you do rent it
out (whichever is longer), the IRS could consider the
place a residential rental property and axe your interest
deduction.
Points
Did you pay points to get a better rate on any of your
various home loans? They offer a tax break, too. The
only issue is exactly when you get to claim it.
The IRS lets you deduct points in the
year you paid them if, among other things, the loan
is to purchase or build your main home, payment of points
is an established business practice in your area and
the points were within the usual range. Make sure your
loan meets all
the qualification requirements so that you can deduct
points all at once.
A homeowner who
pays points on a refinanced
loan is also eligible for this
tax break, but in most cases
the points must be deducted
over the life of the loan. So
if you paid $2,000 in points
to refinance your mortgage for
30 years, you can deduct $5.56
per monthly payment, or a total
of $66.72 if you made 12 payments
in one year on the new loan.
If the refinancing
frees up cash, and you then
use it to improve your house,
you can fully deduct points
on that money in the year you
paid the points. The same rule
applies to home equity loans
or lines of credit. When the
loan money is used for work
on the house, securing the loan,
the points are deductible in
the year the loan is taken out.
If you use the extra cash for
something else, such as buying
a car, you still can deduct
the points but not completely
on one tax return. The points
deductions must be parceled
out over the equity loan's term.
Remember: It's only the portion of the
points related to refi money you used for home improvement
that is eligible for immediate tax-deduction purposes.
The points attributable to the refinanced existing mortgage
balance still must be amortized over the life of the
refinanced loan.
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