THE END OF DECEMBER IS A TIME TO enjoy the holidays and celebrate with family. Of course, the end of 2007 marks the beginning of the New Year. When you look back on the year, as the IRS does, you will want to make sure you are taking the correct tax deduction on your personal tax return for mortgage interest on your home.
One of the greatest benefits to owning a home is the tax deduction you earn. The government wants you to own a home and therefore allows you to deduct the interest you pay annually as a tax break. It works like this: Homeowners are allowed to take a deduction for mortgage interest they pay on a loan that is secured by their principal residence or a second home, up to $1 million on personal tax returns.
So what qualifies you may ask? Do you remember that line of credit you used to redo your kitchen? That line of credit, along with any type of home equity loan and of course your mortgage, qualify as deductible interest as long as you are legally obligated to repay the loan. What does not qualify is any type of purchase where you do hold title such as a lease option. A lease option is where you rent a property with a certain amount of your rent going toward the purchase price of the home, with an option to purchase the home at the end of the lease term. With a lease option, since you do not have title of the property you are not allowed to claim the deduction. However, if you purchased a home privately and the seller holds 100 percent of the paper on the home, you have title and are paying the seller back as agreed, you meet the deduction requirements and are allowed to deduct the mortgage interest.
A tax deduction for your primary or secondary home is great, but the IRS does not give you carte blanche on the deduction. The IRS has placed limits of one million dollars on mortgages and $100,000 on home equity loans. Once you pass those limits, you cannot deduct any more. Be aware that you are allowed to deduct interest, not principal. What that means is if you paid $50,000 in mortgage interest and $10,000 in principal reduction, you cannot deduct $60,000, only the original $50,000. However, if you just make interest-only payments on your home, you can deduct the entire payment since none of the payments have gone toward principal reduction.
Knowing what you can and cannot deduct is important, especially at the end of the year when you are deciding how to plan the following tax year. Keep in mind tax planning and keeping clean straightforward records, can save you and your accountant a lot of work. As for deductions, speak to an accountant or CPA for all current tax laws and advice.
Keep in mind: This article is an opinion and does not represent legal or professional advice.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on December 26, 2007. Read the original PDF.