Home sweet homeownership tax breaks
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. 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 ax your interest
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 them.
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
But if the refinancing frees up cash you
then use 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 point 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
|-- Updated: Feb. 19, 2009