Mortgage Interest Deductions: Home Acquisition Loans

By Kelly Wingard
NFNS 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.

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 University of Illinois Tax School training manual for tax professionals.

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