Mortgage interest upon a borrowed loan for your principal (main) home, secondary (holiday) home, or rental property is fully deducitble on your tax return. To be eligible for this deduction, you must meet the IRS requirements. The deduction should be listed on Schedule A in Form 1040. Up to $1,000,000 of loans obtained after October 14, 1987 qualify for the deduction (or $50,000 if married yet filing separately)
There are two (2) types of home mortgages:
(i) home acquisition loans – used to buy, construct or improve upon taxpayer’s principal or secondary home
(ii) home-equity loans – loan for any other purpose. Up to $1000,000 of such debt qualifies for an interest deduction. It may even be used to pay off consumer debts on which the interest is not deductible. All of the interest on a home-equity loan is deductible as long as the balance on the loan is less than the actual equity in the home. Actual equity is determined by subtracting the actual balance on the first mortgage from the fair market value of the home. This means that no interest deduction is permitted for any portion of the home-equity loan which exceed the actual equity (the FMV reduced by the first mortgage balance)
Home mortgage interest is generally any interest you pay upon a loan secured by your home (principal or secondary). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. If your 2004 adjusted gross income exceeds $142,700 ($71,350 if married yet filing separately), your home mortgage interest deduction is subject to the 3% phaseout rule (3% reduction of itemized deductions).
All of the interest you pay on a mortgage to purchase your home is fully deductible. Second mortgage interest is also included. Your home mortgage is reported to you on Form 1098, Mortgage Interest Statement issued by the financial institution to which you made the payments. As with any deductible, the IRS has requirements that you must meet:
(i) you itemize your deductions
(ii) you must be legally liable for the loan
(iii) the mortgage must be a secured debt on a qualified home
A “secured debt” is one in which you sign an instrument (e.g., mortgage, deed of trust, land contract) that:
* makes your ownership in a qualified home security for payment of debt
* provides, in any case of default, that your home could satisfy the debt
* is recorded or satisfies similar requirements under state law
A “qualified home” is your main or second home, which is a porperty that has sleeping, cooking and toilet facilities.
There is a two (2) residence limit for qualifying mortgage debt. If you own more than two (2) houses, you need to decide which residence will be considered your second residence. The home mortgage interest on the second residence is fully deductible.
With real estate taxes, you can prepay your real estate taxed ue next year and deduct them on your tax return. The rules are different with home mortgage interest. If you prepay interest for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it applies. You can thus deduct in each calendar year only the home mortgage interest that qualifies as home mortgage interest for that calendar year.
If you refinance your original mortgage for a new mortgage that is greater than the original one, you cannot deduct interest “in excess” of the current balance on your original mortgage.
High income tax payers (AGI exceeding $111,800) lose some deductions under the 1994 3% reduction rule. For example, if your AGI exceeds the $111,800 by $20,000, you lose $600 of your deductions (3% of the excess of $20,000)
Loans used for substantial home improvement are treated as acquisition debt subject to the $1,000,000 ceiling instead of the $100,000 limit.
If the loan proceeds are used to purchase tax-exempt bonds, then the interest is not deductible.
Points paid during refinancing must be deducted over the life of the loan. For a thirty (3o)-year loan, you divide the points by 30 and get to deduct that fractional amount each year. However, if you did a “cash out” refinance and used some of the funds to improve your primary home, a portion of the points is deductibel in the calendar year in which you paid them, that portion related to how much of the loan was used for home improvement.
As a first-time Homeowner, I found Publication 530 (Tax Information for First-Time Homeowners) very useful. Another useful document is Publication 536 (Home Mortgage Interest Deduction).
If you are moving to a New Home, your moving expenses may be deductible on your federal tax return using Form 3903 if you meet the following criteria:
* Move closely related to the start of work at a new joblocation
You should actually go to work (report) at the new location within one (1) year from the date of move. if you do not move within one (1) year of the date you begin work, you ordinarily cannot deduct the expenses unless extenuating circmustances precluded you from moving within that time.
* Meet the distance test
New main job location is at least fifty (50) miles farther from your former home than your old main joblocation was from your former home. The distance between a joblocation and your home is the shortest of the more commonly traveled routes between them. This does not take into account the location of your new home.
* Meet the time test
(i) For employees: you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location
(ii) For self-employeds: you must work full time for at least 39 weeks during the first twelve (12) months and for a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new job location
If your employer reimburses the cost of the move, the remibursement has to be declared on your tax return.
Reasaonable deductible moving expenses are:
(i) actual cost of moving your household goods and personal effects (including in-transit or foreign-move storage expenses), and
(ii) travel (including lodging but not meals) to your new home
* for travel by personal car, this includes actual expenses (gas and oil, if you keep an accurate record of each expense) and standard mileage rate (14 c/mile for FY 2004)
As part of your moving expenses, you cannot deduct:
* any part of the purchase price of your new home
* car tags
* driver’s license fee
* expenses of buying or selling a home
* expenses of getting or breaking a lease
* home improvement to help sell your home
* loss on the sale of your home
* loss from disposal of memberships in clubs
* meal expenses
* mortgage penalties
* pre-move househunting expenses
* real estate taxes
* refitting of carpets and draperies
* security deposits given up owing to the move
* storage charges except as incurred in transit and foreign moves
* temporary living expense
If you sell your principal home, you are able to exclude up to $250,000 of gain (per person filing) from your federal tax return, an exclusion permitted each time you sell your main home but not frequently than once every two (2) years. For eligibility, your home must have been owned by you and used as your principal home for at least two (2) of the last five (5) years prior to sale. You cannot exclude gain on another home sold during the two (2) years before the current sale.
Use Form 8822 to notify the IRS of your Change of Address.