Deducting home mortgage interest on your taxes...simple, right? Well, maybe... For the majority of taxpayers, it is a straightforward process, but for some the situation is far from simple.

More about home mortgage interest

There are four classes of home mortgage debt per the IRS:

1. Grandfathered debt- There are very few of these left as by definition, this is a mortgage originated on or prior to October 13th, 1987. With these mortgages, all of the interest is deductible, not taking into account how the proceeds were actually used.
2. Acquisition debt- A mortgage in which the proceeds were used to build, improve or buy a primary or second home is known as acquisition debt. Interest on up to $1,000,000 of acquisition debt is deductible. (i.e., $500,000 for married filing separately). An unmarried couple living together, therefore, is permitted to $2,000,000 in acquisition debt, something that many feel is unfair.
3. Home Equity debt- Proceeds for a loan of this sort are used for purposes besides buying, building, or improving primary or secondary residences. Taxpayers are permitted up to $100,000 in home equity debt.
4. Refinanced debt- For taxpayers refinancing their mortgages, any debts incurred are treated as refinanced debts.

Other requirements for deducting home mortgage interest

• The debt must be secured debt. This means that the home has been given as collateral for the debt.
• You are allowed to deduct mortgage interest if the home in question is your qualified home. This means the place you usually reside, for most of the year. A second home that is not rented out is considered a qualified home, too. You are limited to two qualified homes for purposes of the deduction.
• You typically cannot deduct the interest if your name is not on the mortgage. You must have the legal liability to pay the mortgage, but there are two exceptions to this rule.
  • You may deduct the interest if you are a co-owner on the mortgage title.
  • You may be able to deduct the interest if you live in the house in question and make the mortgage payments under an agreement with the main owner.
• Your own funds must be used to pay the mortgage. You are not permitted to deduct home mortgage interest if you do not itemize deductions.

Form 1098

For most taxpayers subject to a mortgage, IRS Form 1098, Mortgage Interest Statement is filed documenting the amount of potentially deductible interest which has been reported to IRS.

The deduction applies if you pay interest on a cooperative, mobile home, condominium, certain boats, or recreational vehicle used as a residence.

Wondering if you qualify for the deduction? We can help you settle your confusion. Contact us today.