THE LAST GREAT SHELTER
As a homeowner, you may have wondered about the tax benefits of owning a home. Your home is probably the last great widely available tax shelter. So, it pays to review some of the tax simplications of home ownership. For now, let's just look at some of the rules for home mortgage interest, home equity debt interest and "points."
The rule used to be pretty simple; home mortgage interest was deductible. Then Congress "simplified" the tax code. Nothing's simple anymore. Under current law, home mortgage interest incurred to purchase, construct or substantially improve your first or second home is deductible to the extent of $1 million of debt secured by either home. That's right, the $1 million limit applies to the total debt on both homes. This so-called "acquisition" debt will only go down over time. it generally cannot be increased by a subsequent refinancing. Mortgage loans obtained on or before October 13, 1987 are not subject to the $1 million limit, but will count against the over-all $1 million limit.
"Home" for the purpose of these rules includes just about any place you call home that has sleeping quarters, cooking facilities and a bathroom. So, a condominium, co-operative apartment, mobile home and houseboat all qualify. The rules permit you to include both a first and a second residence. Your first or primary residence, generally, can be thought of as the place you call "home." The second residence may be a vacation home, but be careful - special rules apply if you rent out your vacation home.
The interest on a total of $100,000 of "home equity" debt secured by your first or second home is also deductible, almost regardless of the use of the loan proceeds. The $100,000 limit is further limited by the value of the home reduced by any acquisition indebtedness. For example, suppose you own a $150,000 house on which you still owe $90,000 on the original mortgage. In this situation, deductible interest would be limited to $60,000 of home equity indebtedness.
As we all know by now, the interest on a consumer car loan or ordinary credit card purchases are no longer deductible. However, if the car loan or other consumer debt is incurred via a home equity loan, the interest is deductible. But I said above, "almost." The interest on debt incurred to purchase or maintain a position in municipal bonds is not deductible, even if incurred through a home equity loan.
"Points" are another very confusing area. A "point" is 1% of the amount of the mortgage and the term is used to describe a variety of charges imposed by a mortgage lender. To be deductible, the following must apply: 1) the points must be incurred to buy or build your principal residence only, 2) the points must represent additional interest and not pay for some other service, 3) the loan must be secured by your principal residence, 4) the charging of points must be an established business practice in your area, 5) the points must be within the amount normally charged, 6) the points must be clearly designated as points on the Uniform Settlement Statement, 7) the points must be computed as a percentage of the loan amount and 8) the points may be paid by the borrower or seller. Refinancing points are generally not currently deductible and must be deducted evenly over the term of the mortgage loan.
By W. Barton Close CFP®
Certified Financial Planner Board of Standards, Inc.,
owns the certification marks above, which it awards
to individuals who successfully complete initial and
ongoing certification requierments.