Second mortgages have different tax deductions than an initial mortgage. The government places limits on the amount and circumstances that paid interest can be deducted. The following principles will give you a general understanding of the rules. However, you should check with a tax preparer for specific recommendations for your own tax situation. Interest That Can Be Deducted In general any mortgage interest you pay in a particular year can be used as a deduction for that years taxes. This can include interest on a second mortgage, home equity loan, or home equity line of credit. You must be liable for the loan. And only first and second home mortgage interest qualifies as long as you live on the property. Of course there are exceptions. If you are building a home, you have 24 months to deduct interest even if you arent living in the house. You can also deduct interest on destroyed property for a period of time. Homes that are rented out are seen as investments. Their interest cannot be deducted under this rule. Late payment and early payment fees are also considered interest payments by the IRS and can be included in the deductible amount. Limits On Deductible Amounts The government places a variety of limits on how much you can deduct on additional home loans. For loans used to fund home improvement projects, the debt limit is $1 million ($500,000 for those married but filing separately). There are also time limits on when the funds must be used. The total loan amount, which could include other loans, must not exceed the fair market value of the property The interest on home equity loans used for other purposes, such as paying for college or consolidating debt, is also deductible with exceptions. Currently, the limit is a maximum of $100,000 or $50,000 for those married but filing separately. And the fair market value rule also applies. How To Deduct Your Interest To deduct your mortgage interest, you will have to file a Form 1040 with itemized deductions. Your financing company will send you Form 1098 listing your paid interest. If you paid more than the amounted stated, you can attach a statement to your tax form explaining why. IRS Publication 936 explains circumstances for home mortgage interest deductions. This deduction is subject to changes, so check for updates. |
