I was listening to a recent interview of six different economists on NPR. The topic was which tax and spending policies were good or bad for America. Two things shocked me:
- That six economists could agree on anything, and..
- The one thing they agreed on was that the home mortgage interest deduction was a bad policy. They argued that it disproportionately favored the wealthy, encouraged excess debt, and drove up the cost of housing. Luckily for us mortgage holders, the only thing congressmen think is worse than bad policy is not getting re-elected. Therefore, it is highly unlikely it will ever be repealed.
Today’s article will answer the most common questions about many people’s largest tax deduction.
- Is there a limit to how much mortgage interest I can deduct?
Yes. Sadly, for my rock star friends, you can only deduct the interest on the first $1 million in mortgage debt, plus $100k in home equity loans. These are the total mortgage limits whether applied to the debt on a single home or two homes.
Interestingly, you can deduct the interest on up to $1.1 million in mortgage debt even if you do not have a HELOC. However, it does not work the other way around. You would only be able to deduct the interest on $100k of the HELOC debt even if you only borrowed $800k on the primary mortgage and subsequently took out a $300k home equity line.
All these deductibility thresholds are the same whether you are married or single, but they are cut in half if you are married individuals filing separate returns. The IRS is not a big fan of married filing separate.
- Can I deduct the mortgage interest on a vacation home?
Yes! You can deduct the interest on your primary residence and one additional home.
- Can I deduct the mortgage interest if I refinance and increase my loan balance?
You can only deduct the interest on your home mortgage if the loan qualifies as either acquisition indebtedness or home equity indebtedness (described in #4 below). Acquisition indebtedness is a loan used to acquire, build, or improve your home.
- Can I deduct the mortgage interest on a Home Equity Line of Credit (HELOC)?
Yes, within limits. You can borrow up to $100k on a home equity line of credit, use it for anything you like (e.g., cars, vacations, new wardrobe, etc.) and deduct the interest. It might make sense to consolidate your personal loans into a home equity loan if you are paying interest on nondeductible personal debt. One minor issue, which rarely comes into play these days, is the total debt on the home cannot exceed the value of the home.
- Can I deduct the mortgage interest on a rental property?
Yes. This works a bit differently than the home mortgage interest deduction, which is an itemized deduction subject to its own limitations and phase-outs. The interest deduction on a rental property is not limited to $1 million in mortgage debt, but rather is an expense deductible against rental income. Losses on rental properties (when expenses exceed rental revenue) are only deductible up to a limit (see passive activity rules) and disallowed losses may be carried forward.
- Can you deduct mortgage interest on an RV or houseboat?
Yes. A home is anything that has sleeping accommodations, a toilet, and cooking facilities. This would include mobile homes and even some types of boats. If that isn’t reason enough to buy a houseboat, I don’t know what is.
- Is mortgage interest deductible if I rent my home less than 15 days a year?
Yes. The mortgage interest is deductible and you don’t even have to claim the rental income! A home rented for fewer than 15 days is classified as a personal use asset (as opposed to a rental property). The qualified mortgage interest and property taxes will be reported as an itemized deduction on Schedule A of your tax return.
On the other hand, if your home is rented for more than 15 days, you must report all your rental income and can deduct your rental expenses. However, you must divide your expenses between the rental use and the personal use. I will leave it up to your CPA or the IRS to “enlighten” you with those details.
Have a great week and good luck with your tax returns!