One would think that the deduction for home mortgage interest would be rather straightforward, but with Congress and the IRS involved, that assumption is not always a correct one. If you itemize deductions, home mortgage interest may be deducted on Schedule A. Note also that interest paid on a rental property falls under different rules and is not the subject of this article.
Home mortgages are classified as home acquisition debt or home equity debt. Home acquisition debt is debt incurred to buy, build, or improve the taxpayer’s home. Deductible interest is limited to debt on $1,000,000 of acquisition debt. Home equity debt is debt on the house that is not to buy, build or improve the home. It is limited to $100,000 for interest deduction purposes. This is further limited by the fair market value of the home minus outstanding home acquisition debt. Note that these are overall limits, not per home. Refinanced debt may still qualify as home acquisition debt up to the amount owed on the old loan. In addition, a taxpayer purchasing a new home with a debt of $1,100,000 can count the $100,000 excess as home equity debt.
One should note that refinancing a home loan could result in the loss of a deduction. Consider Taxpayers Joe and Joan, a married couple. Joe and Joan own two homes, their main residence in Florida and a mountain home in North Carolina. The homes are valued at $550,000 and $350,000 respectively. The main home is debt free, but Joe and Joan have a $300,000 mortgage on the mountain home. They propose to take out a mortgage on the main home in the amount of $500,000 and pay off the debt on the mountain home. They will use the extra $200,000 for various personal reasons.
If they pursue this route, they can only deduct interest on $100,000, as the entire loan is considered home equity debt, rather than acquisition debt. Interest on the remaining portion of the mortgage is not deductible.
The question has arisen, “Do the limits apply based on residencies or taxpayer?” The IRS has maintained the limit applies to the residence, but a recent court case in the Ninth Circuit Court of Appeals ruled that the limit was per taxpayer. It should be noted that a married couple filing jointly is regarded as one taxpayer. An unmarried couple living together would be two taxpayers. This obviously is an inconsistency that penalizes married taxpayers and is likely to be remedied one way or the other.
Interest is deductible only if the home is a qualified residence. This is defined rather liberally, as it may be a house, mobile home, trailer, condominium, co-operative, boat, or similar property. The residence must contain sleeping, toilet, and cooking facilities.
The interest generally may be deducted only by the taxpayer who is legally liable for the debt and makes the payments. However, an equitable owner may take the deduction under circumstances when they made the payments and were responsible for the house.
Interest paid on the taxpayer’s main home plus a second home may be deducted. Interest on only two homes may be deducted in any given year.
The IRS has some difficulty determining when the debt limits are exceeded, and when interest on more than two homes is deducted, so new reporting rules have been put in place, beginning for tax year 2016. These rules require that the Form 1098 from the lender include:
1. The amount of outstanding principal at the beginning of the year,
2. The date of the origination of the loan, and
3.The address of the property scoured by the loan.
These changes will help identify when a refinancing has occurred, helping to identify when there is home equity debt. It will also alert the IRS of when a taxpayer has non-deductible mortgage interest, either by exceeding the limit or the number of residences having mortgage debt.
A couple of other issues relating to home mortgages. If points are paid in incurring acquisition debt, they may be deducted in the year the loan originates. If it is home equity debt, the points are amortized and deducted over the life of the loan. When the loan is paid off, remaining points may be deducted in that year.
The subject of deducting home mortgage interest is indeed complex. You should consult your tax professional to help sort out the deductibility of any home mortgage interest you have paid.
John Stancil
Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.
Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.
He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.
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