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FAQ Mortgage Interest Tax Deduction

Mortgage Interest can be qualified as a Tax Deduction for the qualified home and mortgage. In fact, Mortgage Interest Tax Deduction remains a huge tax breaks for homeowners. Here are the common questions and answers. Internal Revenue Services (IRS) updates the tax laws and regulations every year. Be sure to keep with the current tax laws.

How to claim mortgage interest tax deduction?

The Lender sends the Form 1098 every year. In the form 1098, you can see how much mortgage interest paid. From the form 1098, you transfer the amount to Schedule A Form 1040 of income tax form.

What is secured debt?

A home acquisition that uses mortgage, deed of trust, or land contract is a secured debt. It provides a way for repayment in case of default, establishes the ownership of the home, and records the transaction under the local state of law.

How to distinguish a qualified home?

Any property that has sleeping, cooking, and toilet facility includes house, condominium, cooperative, mobile home, house trailer, or boat. Plus, the home must be first and second home of the homeowner.

Can I deduct mortgage interest for rented out second home?

Yes, you may deduct as long as you use the home more than 14 days or 10% of the calendar year.

Am I allowed to several second home?

If you have more than one second home, you can only use one second home for tax deduction. IRS does not limit which second home to choose. In case of new home purchases, main home disqualifies, and second home sells, you may choose another home as your second home.

What if I rented out part of the home?

You may treat the home as residential if you meet the following. First, the tenant use the rented part as primarily for residential. Next, the rented part does not have separate cooking, sleeping, and toilet facilities.

Does a home under construction consider as a qualified home?

You may consider a home under construction as a qualified home if the home is ready for occupancy in 24 months. The 24 months can start on or after the construction begins.

How about deducting a destroyed home?

In case the home was destroyed by fire, storm, tornado, earthquake, or other casualty, you can continue to deduct mortgage interest. However, you must rebuild the home, or sell the land.

Do I lose my deduction on refinanced of Grandfathered Debt?

No, it is still considers as Grandfathered Debt after your refinance the mortgage.

Mortgage Interest Tax Deduction Shoots Down Taxes

The Mortgage Interest that you paid to acquire your first and second home can be deducted in your income tax. As you read on, you will learn how to deduct and calculate Mortgage Interest for your income tax return. Plus, you will learn how Mortgage Interest works.

How it works

The Lender sends you form 1098. The form 1098 shows how much mortgage interest was paid. Using the values from form 1098, you transfer the values to Schedule A Form 1040 of your income tax form.

Requirements for Tax Deductions

There are three conditions to meet to be able to deduct mortgage interest. First, you must fill out the Schedule A Form 1040. Second, you must be liable for the loan. Basically, the homeowner pays the mortgage payment. And, he owns the home. Lastly, the home must be a secured debt of a qualified home.

Mortgage, Deed of Trust, or Land Contract instrument secures a debt. The instrument provides a way to satisfy debt in case of default, makes the owner liable to pay debt, and records under the local state of law.

Qualified Home means house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. And, the home is first and second home of the homeowner.

Qualified Mortgages

The three categories are Grandfathered Debt, Home Acquisition Debt, and Home Equity Debt. Grandfathered Debt is acquired mortgage prior October 13, 1987. If the Homeowner refinanced the mortgage, the mortgage remains as Grandfathered Debt. Home Acquisition Debt is acquired mortgage after October 13, 1987 to buy, build, or improve a home. The total mortgage must not exceed $1 million. Home Equity Debt is acquired mortgage after October 13, 1987 not to buy, build, or improve a home. The mortgage must not exceed $100,000 of the fair market value.

IRS yearly update

This article may or not contain the most current tax regulations, and laws. You may want to consider checking with your trusted Tax Advisor or IRS.

2 Gigantic Homeowner Tax Breaks

It is that time of the year again, when we scram for last minute completing and filing tax return. You will be happy to know that Internal Revenue Service (IRS) allows you to deduct the interest and discount points.

Interest

Interest on mortgage can be deducted on your tax return. To claim interest on mortgage, you must meet the following requirements. First, your home must be your first or second home. Second, the purchase price must not exceed $1,000,000, and the home loans equity must not exceed $100,000. Third, there have a deed of trust that is recorded among land records against your house.

Discount Points

Many homeowner elects for discount points to lower mortgage payment. It works by paying a certain amount at closing to lower mortgage payment. Each point equals one percent. For example, Jim wants to bring down the interest rate from 7.5 % to 5.5 %. Jim elects for 2 discount points.

There are three situations to claim discount points. First, first time homebuyers may claim the full amount of discount points on the year paid. Second, the homeowners may claim the full amount of discount points, when the homeowners refinance towards the improvement of the home. Third, the homeowners claim the discount points over the life of the mortgage without the home improvement. If there is unused discount points towards refinance, the homeowners may claim the unused discount points on the year of refinance.

Internal Revenue Services (IRS) change rules and taxes regulations every year. You may want to verify with your tax advisor, mortgage advisor, and IRS for latest updates.

How to claim the Discount Points on your income tax return

Internal Revenue Service (IRS) allows the deduction of the discount points on your income tax return. Discount points which are one of the most important tax deductions to homebuyers are paid upfront to reduce the mortgage payment.

Calculate the Discount Points

Each point equals one percent of the principal. For example, a 2 discount points on $150,000 mortgage comes to $3,000 ($150,000 x 0.02). The Closing Statements shows how much is your discount points. If you do not see discount points, have no fear. Discount points are also called Loan Origination Fees, Maximum Loan Charges, or Loan Discount.

First Time Homebuyer Discount Points

For a first time buyer, IRS allows to claim the full amount of discount points on the year paid. For example, Joe bought his first home on 2005. In his closing statement, the discount points come to $3,000. Joe claims the full amount on Schedule A of his income tax return.

Discount Points on refinance without home improvement

The homeowners claim the full amount of discount points, when the homeowners refinance towards the improvement of the home. Without the home improvement, the homeowners claim the discount points over the life of the mortgage. For example, Joe refinances his home with a lower interest rate on a 25 year mortgage. The closing statement shows $3000 discount points. Joe claims $120 per year ($3,000 / 25 year mortgage).

Discount Points on refinance with home improvement

The discount points which are paid to improve the home is fully tax deductible on the year paid. The rest are claim over the life of the loan. For example, Joe refinances his home to add a swimming pool on a 25 year mortgage. He paid $20,000 to add a swimming pool. The total mortgage comes to $150,000. The closing statement states $3,000 discount points. Joe claims $400 ($20,000 swimming pool / $150,000 principal x $3,000) + $104 per year ([$3,000 discount points - $400 discount points of swimming pool] / 25 year mortgage).

If the homeowner has an outstanding discount points to claim, the homeowner claims the outstanding discount points on the year of refinance. For example, Joe has $2,000 discount points which are not claimed yet. Joe claims a total of $2,504 ($2,000 outstanding discount points + $400 swimming pool discount points + $104 per year discount points).

IRS yearly update

This article may or not contain the most current tax regulations, and laws. You may want to consider checking with your trusted Tax Advisor or IRS.

Discount Points lowers mortgage payment

Discount points are paid upfront to lower the mortgage. Borrowers often confuse between origination fee and discount points. Although the calculation of origination fee and discount points are the same, both are two different cost of borrowing. The origination fee is paid for the privilege of acquiring a mortgage. Ask your mortgage consultant if you need to pay origination fee too.

How to calculate discount points?

Discount points usually range from 1 to 3 points where each point equals one percent. For example, the borrower pays $1,500 upfront ((1% / 100) * $150,000) on a 1% discount points of $150,000 mortgage.

How much is the monthly mortgage payment with or without discount points?

On a $150,000 principal, 6.5% interest rate, 1 discount points, and 30 year mortgage, the monthly mortgage payment without discount points amounts to $948.10. Using 1 discount points, the borrower pays only $851.68 monthly mortgage payment which saves the borrower $96.42.

When you do get back the discount points?

Recoup time is how long to get all the money back with discount points upfront. The borrower gets $1,500 back in 16 months ($96.42 x 16). The borrower benefits from discount points if he does not leave and refinance before the recoup time on his home. Let’s say the borrower locks the mortgage on a five year mortgage term. The borrower pays $851.68 for five years which put $5,785.20 ([$948.10 x 60 months] – [$851.68 x 60 months]) back on his pocket.

General Rule

Discount Points are options. It is up to the borrower to decide whether to buy discount points. With planning and shopping, the borrower indeed can save money. Not to mention, the IRS allows the discount points as a tax deductible.


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