Though you’ll have new responsibilities as homeowners, many advantages come from owning your property. The significant benefit of buying your own home is to increase financial security.
With a fixed-rate loan, you know that, unlike renters who pay according to their income and can’t always afford more payments, monthly mortgage costs (excluding taxes and insurance) will never increase without interest rates increasing dramatically in turn.
Equity can be built up in your home by paying off the principal on any loan or just leaving it alone to appreciate over time when left unoccupied. But buying a house isn’t all about what’s inside – owning one comes with tax incentives through home mortgage interest deduction, which allows people who purchase homes to subtract some of their taxable income each year if they meet specific qualifications.
This excludes other types of taxes such as sales tax because they’re not related directly towards making money within yourself or real estate values like mortgages instead of investing within yourself financially.
What Do You Mean by Home Mortgage Interest Deduction?
If you are in a high tax bracket or have been saving, the home mortgage interest deduction
is significant. If your taxes aren’t too steep, it could be even more helpful because you get to deduct that much more on your return.
What Counts as Mortgage Interest?
The mortgage interest on your primary home or second home can be deducted as deductible mortgage interest. Before 2018, there was a maximum deduction of $1 million for debt. From 2018 onwards, the maximum is $750,000.
As of December 14, 2017, existing mortgages will continue to receive the same tax treatment under previous rules (however, mortgages with a limit up until December 14 are treated differently).
Mortgage payments made towards buying your own homes, secondary loans secured against their value, line/savings accounts used towards building equity all count for mortgage interests.
Who Can Take a Deduction?
If you are legally obliged to pay back a loan, and if the payments are being made, it doesn’t matter who is taking out the loan. If both husband-and-wife sign for that loan, only one can be considered a primary borrower – either husband or wife.
And when you help your son or daughter with their mortgage payment by co-signing on their behalf, this home mortgage interest deduction will apply too unless there was another legal signing involved, in which case that person would have been the primary borrower.
Any Limit for the Deduction?
You could deduct interest on your home mortgage debt if used to purchase your first home or improve or construct that same property. The limit is $1 million ($500,000 if you’re married and filing separately) between tax years before 2018, with an exception made in cases where a loan existed as of December 14, 2017.
Beginning in 2018, this limit is lowered from $1 million ($750,000) down to just a quarter-million dollars starting January 1, 2019.
Special Situations
- Owning a second home rented out periodically is allowed as long as it is used for more than 14 days or 10 % of the days your landlord rents it at fair market value. If your second home rentals are fewer than these required numbers, this will make it an investment property and not be considered a vacation home by tax authorities.
- You can elect to treat another house as your second vacation home each year, provided both houses meet the qualifications listed above.
- However, suppose you purchase land-use rights before ownership becomes final on any properties (even though those payments may carry interest). In that case, no rental income from such purchases may qualify as business deductions because they would not fall under “acquiring or producing real estate.”
- Furthermore, if proceeds from investments go towards paying off loans to purchase other types of property with cash instead, business investments wouldn’t count either.
- When you pay interest on a loan or have other debt, the claim is usually for personal use. This is a nondeductible income.
- When you borrow to buy investments that produce tax-exempt income (municipal bonds) or purchase single-premium life insurance and annuity contracts using your mortgage proceeds as funds in place of cash, the loans are not considered mortgages anymore. They are “carried” by investment products that don’t generate any yearly taxable earnings like a typical home mortgage. The term “to carry” means these types of loans were borrowed with money already invested elsewhere and used instead to replace those funds to make their purchases tax-free substantially.
Forms to Follow
To better understand what records you may need for home mortgage interest deduction, it is best to look at an IRS inquiry. You’ll want the following information in your case:
- Form 1098 shows how much interest you paid during the year and any deductible points or closing statements from refinancing that show the mortgage interest name of the person who took out the loan on the property (if applicable).
- Social Security number of buyers and address are all necessary pieces of documentation.
- The last document will be your federal tax return if you’re making a home equity debt deduction for 2017 taxes as well as qualifying expenses over the lifetime/interest rate repayment period.
Summary
Many people believe that the home mortgage interest deduction encourages homeownership, but in contrast to this idea, a recent study suggests it does not increase homeownership rates.
Instead of promoting more ownership, the deduction increases house prices for those who can afford them by making owning property more affordable for itemizing taxpayers and even reducing taxes on wealthier people than lower-income ones.
In short – it benefits wealthy individuals over low-income individuals since they are required to take advantage of things like higher-priced homes with deductions or itemize their income when claiming such a benefit. Being a first-time homeowner will likely bring up questions for you.
That is why it is encouraged that homeowners should speak with their tax professional or use the expertise of a financial tax calculator if they have any questions related to this topic. They can use the Flyfin tax calculator for this purpose.
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