IRS Rules on Mortgage Interest Deduction
A homeowner paying interest on a mortgage or second mortgage may deduct the interest from his taxable income. To write the interest off, a homeowner must itemize deductions using IRS form 1040, as opposed to taking the standardized deduction. IRS Publication 936 details the principles owners need to fulfill to deduct their interest.
The House
A homeowner could claim the mortgage interest deduction only on her main residence or her second house, the IRS states. If she owns more houses, she can only write off the interest on two of them. In case the owner rents out part of her residence or utilizes it as a home office, interest on that part of the house is not allowable: If 30 percent of the home is used for business, then she could only deduct 70 percent of their interest. In case the owner rents out her second house, she must spend enough time there each year to qualify for the deduction, or the IRS will treat it as company property. The time varies with the number.
The Interest
To maintain the interest deduction, a homeowner has to have a debtor-creditor relationship with the lender and must be legally accountable for the loan. That can’t be deducted by him, if someone pays interest on his son’s mortgage for a gift, as an example. The debtor’s loan must be”secured” by using his home as collateral; when he takes out another mortgage for at least the value of their home, interest on the”unsecured” portion of this mortgage isn’t deductible. As of 2009, interest is fully deductible on the first $1 million of their mortgage, or $100,000 of another mortgage.
Special Situations
Publication 936 goes to the deduction rules for situations that are several. A homeowner may deduct late payment fees and prepayment penalties from her taxation, as an example. Ministers and members of the army who receive a housing allowance may still deduct their mortgage interest. A homeowner taking a reverse mortgage can’t deduct the interest until she pays it, which is usually when she moves from her home and pays off the whole loan. “Points,” which are prepaid interest due at closing, are allowable, but the deduction must be taken over the life span of the mortgage: $6,000 in points on a 30-year mortgage could mean a $200 deduction each year, as an example.