Tax Benefits of Home Mortgages
When you have a home mortgage, you can benefit from many tax deductions because you can deduct a portion of the interest that you pay on the mortgage. Home mortgage interest is any interest that you pay on a loan for which you use your home as collateral. It doesn’t have to be the initial mortgage you obtained to purchase the home in the beginning. If you pay off this mortgage and then obtain a secured loan for another reason, to make improvements and renovations, the interest on the loan is tax-deductible.
There are certain conditions that you have to meet to take advantage of the tax benefits of home mortgages. These are:
- You have to complete a Form 1040 and include an itemized list of deductions that you included on Schedule A
- You must be the person legally liable for the loan
- The home you use as collateral for the loan must be either your main home or a second home
In most cases you can deduct the full amount of the home mortgage interest on your income tax form. This depends on the date you took out the mortgage, the amount of the loan and how you used the proceeds. There are three categories into which the mortgage must fall to be eligible to claim all of the interest. Mortgages that were taken out prior to 1987 are automatically included. After that date, the home mortgages taken out to buy, build a home under home acquisition debt can total one million dollars and mortgages under home equity debt that are eligible for this deduction can total $100,000.
A wraparound mortgage is not considered eligible for claiming the interest paid as a tax deduction. There are also specifications on whether you can use the second home as a tax deduction. For example, if you rent out the home for the full year, then you cannot gain any tax benefit from the home mortgage interest. You must live in the home for at least 6 months of the year for it to be considered a qualified home. If you have more than one second home, you can only use the interest on one of them for tax purposes.
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