Are Home Interest Loans Deductible From Taxes?
The Internal Revenue Service (IRS) provides taxpayers with a deduction for the interest charges that accrue on a loan to purchase a home. To take advantage of this deduction, you must meet the requirements to itemize deductions on Schedule A. For those who have insufficient expenses to itemize, the tax law provides a standard deduction.
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Qualified Home
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The IRS limits the availability of the interest deduction to loans you use to purchase a qualified home. A qualified home is a main home you use as the principal residence, plus one additional home you use for personal purposes. If you own more than two homes, you can choose to designate a different second home each year as a qualified home. The mortgage you obtain to purchase a qualified home must pledge the relevant home as security to the lender. The terms of the loan must state that the home can satisfy the debt in the event you default on the loan, and it must be enforceable under the relevant state law.
Investment Home
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If you purchase a home and use it to produce income rather than for personal use, you can deduct the amount of interest you pay on a loan to finance the home's purchase. You can deduct interest to the extent it doesn't exceed net investment income, or the gross revenue the property generates minus deductible expenses other than the interest. For example, if you purchase a beach home and collect $20,000 in rent during the tax year and incur $12,000 in deductible expenses, you can deduct a maximum of $8,000 you pay in interest during the year.
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Points
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The points you pay to obtain a mortgage on a qualified home are deductible as mortgage interest. Points include loan origination fees, maximum loan charges, loan discounts and discount points. You can deduct the points you pay in equal portions over the life of the mortgage loan.
Mortgage Interest Limitations
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You can only deduct the interest that accrues on a maximum of $1 million in outstanding principal loan balances on all qualified homes. Excess interest isn't eligible for a deduction in future tax years. The interest on a mortgage you refinance is also deductible. However, you're limited to the interest that accrues on balances that don't exceed the outstanding balance of the original mortgage immediately prior to the refinancing.
Home Equity Loans
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You can deduct the interest you pay on a home equity loan if you don't use the funds to acquire a home and you provide equity in a qualified home as security to the lender. The total home equity debt that's eligible for an interest deduction can't exceed the smaller of $100,000 or the home's fair market value minus the outstanding mortgage balance. This limitation amount applies to the total debt on all qualified homes, not on a per-home basis.
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