You can deduct more than the interest on your mortgage from your taxes. You can deduct interest for home equity indebtedness. Home equity indebtedness is the second kind of mortgage interest defined under the tax code; the first is acquisition indebtedness. It includes any and every kind of borrowing secured by your residence that is not used to acquire, build or substantially improve that residence

Well, what does that mean? Home equity indebtedness typically includes your home equity loan or home equity line of credit. You might use this to buy furniture or other assets. It also includes the cash-out portion of a cash-out refinance, as long as the additional borrowing isn't used to improve the home substantially. That?s already covered in your acquisition indebtedness type of deductible mortgage interest.

Why make the big fuss over the difference between home equity indebtedness and acquisition indebtedness? The difference is critical, because interest on home equity indebtedness is deductible for only $100,000 of debt principal, while acquisition indebtedness is for $1 million of debt principal. The good news is that you get up to $1.1 million of total debt of these two kinds, for which you can write off interest.

One caveat: your home equity indebtedness, when added to acquisition indebtedness, cannot exceed the total value of the home when the loan is incurred--excess interest above the value of the residence would be non-deductible personal interest.

Now, you might think you are laughing all the way to the bank. However, here?s where the alternative minimum tax (AMT) comes in. Home equity indebtedness deductions must be added back to income for AMT purposes as an adjustment item. Therefore, home equity indebtedness interest is not deductible at all for taxpayers subject to the AMT. So, don?t go out and buy that high-end furniture just yet, until you have a tax professional crunch the numbers for you.

In the context of mortgage planning, the AMT makes it critical that clients structure their mortgage borrowing so it qualifies as acquisition indebtedness, which is subject to higher debt limits and no AMT adjustment.

Also remember, that to be eligible under acquisition indebtedness, the debt must be secured by the same residence that the loan will be used for. If funds are borrowed against a primary residence to buy a second, the debt will not qualify!

So, what if you have to refinance? Well, there?s good news here. Under the tax code, if a mortgage was originally considered to be acquisition indebtedness, then any refinancing of that mortgage will continue to be considered acquisition indebtedness, but only to the extent of the original mortgage.

If you borrow more money than your existing mortgage amount, the additional borrowing will be treated like home equity indebtedness. This restriction will apply, regardless of what the additional borrowing was for, unless you can fully document that it was for a substantial improvement on the existing residence.

The rules around mortgage interest deduction are complex. As always, if you have any questions about how you should handle your specific tax situation, get professional advice.

Posted by TheBlogMachine.com at 1:33 PM EDT

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Mortgage interest is tax deductible. The first type of mortgage interest defined under the tax code is called ?acquisition indebtedness?. As you might expect, this includes the cost of borrowing to acquire your home, but also includes debt incurred to build or substantially improve a residence, as long as the debt is secured by the same residence.

What qualifies as a residence? In fact, it includes your principal residence as well as a second residence, like a vacation home. But here?s where you have to be careful. If your vacation home is used and reported as a rental property, you can't treat it as a residence (although you may be able to deduct interest as a rental expense). A tax professional can tell you which approach will best benefit you on a second residence.

Assuming that your residences apply, how much interest can you deduct? Well, the interest is deductible on the first $1 million of principal, for your first residence. Whatever is left over from that first $1 million can be applied to a qualifying second residence. What does this mean? It means that if your principal on your first home is $500,000, then you have $500,000 of debt limit remaining. This remaining debt limit is available to claim for your second home. Now, keep in mind that the restriction applies to the amount of principle borrowed and does not relate to the amount of interest paid. In other words, no matter the interest rate on your mortgage, if your debt qualifies and falls within the $1 Million limit, you can claim the full amount of your interest costs.

So, in short, acquisition indebtedness includes all the money you borrow to buy your home, plus any money borrowed to substantially improve your home. Of course, you'll have to be able to document it.

You can also deduct home equity indebtedness, but the rules will be different than acquisition indebtedness.

Posted by TheBlogMachine.com at 1:32 PM EDT

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Are you wondering whether to buy a home or not? Well, here?s something that might just give you a little extra push: mortgage interest is a tax deduction! The mortgage interest deduction is one of the most well-known deductions available to US taxpayers. Created in its current form as a part of the Tax Reform Act of 1986, this legislation allows for mortgage interest to be deductible while almost all other forms of personal interest are not.

Further, while there are limits to the amount of debt covered, there is no limit to the dollar amount of interest that you claim on your tax deductions. So, no matter if your interest rate on your mortgage goes up or down, you can claim all interest paid that is on an allowable debt.

What does that mean for you? It means that you get savings on your yearly tax return, while you build equity in a property at the same time. You are not at risk of losing your interest deductibility if interest rates go up. And, this benefit is only available to home owners. If you are a renter, you miss out on this.

However, there?s always a catch. Many taxpayers don't understand that there are actually several limitations on their ability to deduct mortgage interest. The comprehensive rules are not nearly as simple as you might hope. Why? Based on the Internal Revenue Code (IRC), there are actually two different kinds of "mortgage interest" for tax purposes. Different rules, restrictions and deductibility limitations apply to each type. In addition, as more taxpayers find themselves affected by the alternative minimum tax (AMT), the picture gets even more complicated.

See the acquisition indebtedness and the home equity indebtedness pages for more clarification. As always, get professional advice on how you can best take advantage of the mortgage interest deduction rules.

Posted by TheBlogMachine.com at 1:30 PM EDT

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