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Tisha Tolar of Moolanomy writes about personal finance. She also blogs and is co-owner of Trifecta Strategies, LLC.

If you are a first-time homebuyer and missed out on the $8,000 Homebuyer Tax Credit because you didn’t make the April 30th deadline, you still have tax incentives to look forward to in the future. One of the benefits of buying a home is that you can deduct the mortgage interest you are paying on your loan. Since the inception of the income tax in 1913, the mortgage tax deduction is still one of the most popular deductions for homeowners.

How It Works

Generally, all mortgage interest can be deducted from your federal income taxes. There are some stipulations involved including:

  • Taxpayers must file Form 1040 and itemize their deductions on a Schedule A form.
  • Taxpayer must be legally liable for the loan to qualify for the deduction. You are not eligible for the deduction just because you are making payments on a loan for someone else.

There are two types of debt that will allow for a tax deduction on interst.

  • The first debt type is called acquisition debt. This is debt that was used to buy, build on, or improve your residence.
  • The second type of debt is called equity debt. This was used for other reasons and taken out based on the equity in your property.

Between these two debt types, a taxpayer can take out up to $1.1 million in debt and be able to take a full tax deduction of mortgage interest. Again, there are some rules that apply.

  • If you took out a mortgage before October 13, 1987, you can deduct the full amount of the interest you paid. Any mortgages taken out before October 13, 1987 is known as grandfathered debt.
  • If you took out a mortgage after October 13, 1987 to build, buy, or improve a home, you can fully deduct the interest on taxes if the total debt from all mortgages is $1 million or less for married couples or $500,000 or less for married couples filing separately or for singles.
  • For home equity debt after October 13, 1987, monies taken out for reasons besides building, buying, or improving a home must total $100,000 or less for married couples or $50,000 or less for married couples filing separately or singles. The total must also be less than the fair market value of the home minus the total of all grandfathered debt and mortgages taken out after October 13.

Note that even if you qualify based on the rules above, you cannot qualify for the deduction unless your mortgage is considered a secured debt, meaning you used your home as collateral for the loan. If the loan you took was not secured by your home, it is considered a personal loan and therefore the interest is not tax deductible.

Home Qualifications

If you have met the requirements noted above, you also need to make sure your property is considered a qualified home. The home in question must have cooking, sleeping and toilet facilities. These generally would include your primary residence, a vacation or second home, condos, mobile homes, house trailers, and boats.

Interest on a second home is deductible but only on one second home. In order to qualify, you must use the second home at least two weeks (14 days) out of a year. If the second home is used as rental property, you must personally use it more than 10% of the time you have rented out the property. Interest on a rental home can not be deducted of the criteria is not met. Rental information must then be included on tax Schedule E form.

IRS Proof

In order to prove your tax deduction is legitimate if ever audited by the IRS, you will need to have a copy of your Mortgage Interest Statement, Form 1098. The statement will be provided by your mortgage company once each year. If you pay mortgage to an individual outside of a traditional lender, you’ll have to give the name, address and Social Security number of the mortgage holder and show a total amount of interest paid.

The Future of the Mortgage Interest Tax Deduction

The tax deduction that is popular among homeowners is not so loved by those in support of income tax reform. In 2005 a panel under the direction of former President George W. Bush made the recommendation to do away with the mortgage interest tax deduction to help simplify the tax code.

There are also others that oppose continuing this tax deduction which may leave the future of this deduction hanging in the balance. There is nothing currently in the air about abolishing the tax deduction but there is no guarantee taxpayers will have eternity to take advantage of this tax incentive.

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