12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Mortgage Interest Deductions: Home Acquisition Loans
By Kelly WingardNFNS Columnist
All mortgage interest
is not created equally. When it comes to tax deductions, the IRS views home
acquisition loan interest differently than home equity loan interest. Home
acquisition loans refer to mortgages taken out after October 13, 1987 to buy, build, or substantially improve your main home or a
qualified second home.
In order to deduct acquisition interest, your loan must be
secured by the home. The IRS defines a home as property that has
"sleeping, cooking, and toilet facilities." This can include single
family dwellings, condominiums, cooperatives, mobile homes, recreational
vehicles, and houseboats equipped with a head, galley, and bunk.
In addition, you must be legally liable to repay the amount
borrowed for the home. If you are buying a home with your significant other,
and only your S.O.'s name appears on the mortgage, you cannot deduct the loan
interest--even if you pay 100 percent of the mortgage. Ditto for arrangements
with your parents. If Mom and Dad took out the mortgage for your home, you
can't deduct the interest even if you make their payments directly to the bank.
However, if you establish a legitimate debtor-creditor
relationship with your parents by buying the house from them on contract, you
may be able to claim the interest. On the flip-side, your parents have to claim
any interest you pay them as income. And don't even think about making the loan
interest free--the IRS imputes an interest rate on all loans below an
applicable federal rate.
Refinanced Loans
If you refinance your old mortgage, your
new mortgage represents qualified home acquisition debt only up to the balance
of the old mortgage plus any additional amounts borrowed that were used to pay
for substantial improvements or additions to your home. Interest paid on any
amount in excess of qualified home acquisition debt may qualify as a home
equity deduction.
This has been only a general overview of home acquisition
interest. For more complete details, consult with a qualified tax professional
or refer to IRS Publication 936, Home Mortgage
Interest Deduction.
Sources:
IRS:
Pub 936
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She is a regular
contributor to the
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.