Did you know that you can deduct your mortgage interest? Since December of 2017, homeowners can deduct interest on the first $750,000 of your mortgage. Simply add it to your tax return with an itemized claim. Additionally, if your down payment came from a deductible source, such as a second mortgage, another home’s refinance, or a line of credit from another property, you can deduct the down payment as well.
With the mortgage interest deduction benefit, you can reduce your taxable income by the amount you’ve spent in mortgage interest throughout the year. Keep track of your mortgage payments because your loan could help you out come tax time. Here’s an example: If you started an $800,000 loan in 2017, and you’ve paid $25,000 in interest in 2021, you may be able to deduct the entire $25,000 on this year’s return. However, if you got an $800,000 loan in 2021, the deduction benefit may be smaller because of the 2017 tax cuts, which lessened the amount to the first $750,000.
Several items can qualify for as mortgage interest. Single-family houses, apartments, condos, mobile homes, trailers, and house boats are all qualifying properties. However, they must serve as collateral for the loan and contain sleeping, cooking, and bathroom facilities to work. Even if you have a non-taxable house allowance from the military, you can still deduct your home’s mortgage interest. Mortgages through divorce can also count. If you’re looking to benefit from this tax deduction on a second home, you don’t need to use it at all during the year. The house still needs to be collateral for the loan, and if you’re renting it out, it needs to be occupied at least 14 days of the year or more than 10% of the number of days you’ve rented it.
There are a few things that don’t qualify. These include homeowners’ insurance, any extra principal payments you’ve made on your mortgage, title insurance, settlement costs (for the most part), deposits or earnest money you’ve forfeited, and any interest that accrued on a reverse mortgage.
Down Payment Deductions
In general, down payments cannot be deducted on your taxes, but if they come from a deductible source, they can. Since the down payment is part of what gets you the loan, the feed associated with that loan can be deducted. If you did borrow money for a down payment through a deductible source, the deduction can be used the year in white mortgage interest is paid. You can also write off any closing costs that weren’t paid out of pocket. However, be aware that if any down payment funds are paid from a retirement plan, those are taxable as income.
As you can see, there are many taxable benefits homeowners can take advantage of, but it can get complicated and there are always conditions and exceptions. If you have any questions, InterWest Mortgage’s team has the experience and knowledge to help you find out what benefits apply to you. Reach out to us today with any concerns.