This is the second in a four-part series on home mortgages. (Click here to read Part 1 – The Home Mortgage Interest Deduction) We will examine what can be deducted as home mortgage interest. Interest on the debt is deductible up to the statutory limits on the amounts of deductible debt ($1,000,000 for acquisition debt, $100,000 for home equity debt). Interest on excess debt is personal debt and not deductible. In addition, any amount of home equity or refinanced debt that is not used build, buy, or improve the residence is also classified as non-deductible personal debt.
In the purchase of a home it is not uncommon to pay points or an origination fee on the loan. A point is one percent of the loan amount and may be deductible in the year paid if certain conditions are met:
- The loan is secured by the taxpayer’s main home.
- Paying points is an established business practice in the area where the loan was made.
- The points charged were not more than generally charged in the area.
- The taxpayer uses the cash method of accounting.
- The points were not paid in place of amounts that are ordinarily stated separately on the closing statement – appraisal fees, title search, attorney fees, inspection fees, and the like.
- The funds the taxpayer paid at closing plus any seller-paid points, were at least as much as the points charged.
- The loan is used to buy or build the taxpayer’s main home. (Not a second home.)
- The points were computed as a percentage of the loan amount.
- The points are clearly shown on the closing statement as points charged for the mortgage.
If all of these criteria are met, the taxpayer may fully deduct them in the year paid, or amortize them over the life of the loan. If some of the proceeds are used for purposes other than buying, building, improving, or refinancing the point must be allocated between the amounts for each purpose and deducted accordingly. However, remember that if it is not on the closing statement, it is not deductible.
Points paid by the seller are treated as being paid by the buyer. The seller may not deduct them, but reduced the amount realized on the home sale.
If the taxpayer does not qualify to deduct the points currently, they are deducted over the life of the loan. If the loan is paid off early, remaining points may be deducted in that year. However, if the loan is refinanced with the same lender, the remaking points are deducted over the life of the new loan.
Mortgage insurance premiums may be deducted by the buyer as mortgage interest. This deduction is subject to phase out rules. For each $1,000 or portion thereof, the taxpayer’s AGI exceeds $100,000 the mortgage insurance premium deduction is decreased by ten percent.
Note that these rules apply to the primary and secondary residence. Interest on more than two residences may not be deducted. If the house is a rental, different rules apply.
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.
2 comments on “What Can Be Deducted As Home Mortgage Interest?”
Are you going to cover the rules for people who paid cash for their primary homes, but later took a loan on the property secured by the residence? In addition, what happens if the property has increased in value since they paid cash, but took a loan out later?
Ed, The situation to which you refer come under he category of home equity debt, and would be subject to those rules, which is covered in the series. Any loan taken out up to the purchase price could be considered under the acquisition debt rules.
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