Dear Tax Talk,
I currently own a house and I'm paying the mortgage payment. I wanted to buy another house for my retired parents to live in. Both houses are going to be in my wife's and my name. My question is, will I be able to claim the interest deductions on both houses, since my parents are not paying any rent or mortgage payment?
Home mortgage interest is an itemized tax deduction on Schedule A of Form 1040. There are various conditions and limits that apply to deducting mortgage interest. You must be legally liable for the loan.
The mortgage must be a secured debt on a qualified home in which you have an ownership interest. A qualified home is your main home or a second home. Your main home is the property where you ordinarily live.
If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year. If you have more than one second home, you can treat only one as the qualified second home during any year. This means a second home occupied by your parents would qualify as a second home for purposes of the home mortgage interest deduction.
Home acquisition debt is a mortgage you took out after Oct. 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It also must be secured by that home. The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million.
You can also treat an additional $100,000 in mortgage debt as home acquisition debt. Hence, you can deduct the interest on up to $1.1 million in debt secured by a first and second home as home mortgage interest. Interest on home acquisition debt in excess of this limit is considered personal and cannot be deducted.
You would also be able to claim a deduction for real estate taxes you pay on the second home. If your parents pay the taxes, you would not be able to deduct the taxes.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.