Owning your own home is part of the American dream – along with two kids, a dog, and a car. For as long as we can remember, this has been a measure of success in the U.S. and I doubt it will change anytime soon. With that in mind, I want to look at what you need to know about home mortgage interest deductions. This was set up by the Federal Government to help promote home ownership and whether you already own a home, or are looking to buy one, you should know how this program works and what it means for you.
Now I don’t want to go into the minutia of tax law in the U.S., but as a primer, there are five conditions which must be met for you to claim interest payments as tax deductible.
- Only the person who paid the mortgage can apply for the deduction. This can get a bit tricky if you are married and filing jointly, but the mortgage is not in the name of both spouses.
- This also applies if you are paying all or part of the mortgage, but your name is not on the note. So, if there was a change in your circumstances and you have taken over mortgage payments for your spouse, then you want to make sure your name is on the loan.
- As this is tax law, there is an exception. If your name is not on the mortgage, but it is on the legal title, then you may be eligible to apply for the interest deduction.
- However, the property in question must be your primary residence. Now, this get a bit tricky as it is defined as a ‘qualified residence’ so you want to talk to your accountant to confirm how much interest deduction is available on the properties you own.
- The personal mortgage interest deduction is only applicable to the first $1 million acquisition debt (that is the original loan you took out to buy your home) and $100,000 of home equity debt. Granted, most people don’t have to worry about a $1.5 million mortgage, but if you fall into this category you will want to talk to your accountant about how you will properly deduct your interest payments.
As you can see, some of these requirements are subject to interpretation and therefore you will need to get the advice of a good accountant to help you determine how to calculate the interest deduction for your taxes. The deduction is a useful tool and depending on size the of your mortgage, the deduction can help save you thousands in personal income tax.
That being said, let’s take a deeper look at how the mortgage interest deduction works.
- Your Parents Apply for the Mortgage, but You are Servicing the Debt
got good grades, went to a good college, and now have a great job. Congratulations, you probably have $250,000 or more in debt. It does not matter how much money you make at this point; no bank is going to want to touch you. Remember debt finance is all about risk aversion. As such, banks will only approve lenders who they believe have little to no risk.
Given this scenario, you might consider asking your parents to apply for the mortgage in your stead. This is a common tactic and they can just quick claim the home to you shortly after closing. In this way, you can leverage you parent’s credit to buy off the many wonderful Ormewood Park homes for sale.
However, the fun is only beginning. While you are the own paying the mortgage, you are not listed on the mortgage. As such, you would need to be listed on the deed to qualify for the interest deduction, even then it is complicated and you will need to talk to your accountant to make sure you qualify for the deduction.
- You Get a Personal Loan and Buy the House Directly
Maybe you are not drowning in debt, or maybe your parents have enough cash that they can lend you the money you need for the house. However, the loan is not a private mortgage as there is no lien on the property. Some might think they can deduct the interest payments as it is a loan which was used to purchase your house. But if the loan is not secured by the property, then trying to deduct the interest payments it tantamount to tax fraud. If you are looking at this scenario, then set up the loan from your parents as a mortgage, this way you can take advantage of the mortgage interest deduction.
These are just two scenarios and there are hundreds of possible questions when it pertains to how to correctly apply the mortgage interest deduction when tax time comes around. At the end of the day don’t take any chances. Talk to a lawyer or an accountant before you buy your home and make sure you have all your ducks in a row.
