Not All Mortgage Interest is Deductible
Most people believe that all mortgage interest is deductible from their taxes.
But that is not quite the case.
Deductibility applies only to your primary residence plus one additional house.
But there are other factors as well.
There are two items of mortgage interest that can be deductible:
- Acquisition debt of up to $1,000,000.
- Additional equity credit of up to $100,000.
The problem comes in the "fine print" associated with the equity credit.
The first issue is that any loan value in excess of the acquisition debt
is considered equity debt.
This means if you refinace you house for more than the current debt (pull equity out for other uses) then that amount
constitutes equity debt, even though it is not a separate loan.
Even if you just refinace for a lower rate and do not take any money out, if you increase the loan value to cover
the cost of the refinancing (e.g., title fees) then the extra amount is equity debt.
The next issue is that there is an additional limit to the equity debt besides just the $100,000.
It is also limited to the difference between the acquisition debt
and the fair market value (FMV) of the house.
It is this last issue that is currently so troubling.
As real estate values decline, it is possible that the FMV of the house will
drop so that interest that was deductible just last year is no longer deductible.
The taxpayer is responsible for obtaining information necessary to properly complete their return.
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