When buying a home there are a multitude of great tax benefits to take advantage of. Each tax deduction has its own rules and regulations, making it difficult for the new homebuyer to make sure they are taking advantage of them all. Today we’ll delve deeper into mortgage interest deductions. Mortgage interest deductions mainly apply to your first and second home, so when buying your third or fourth property the rules change a little.
A mortgage interest deduction is usually the biggest tax deduction taken by homeowners. All of the interest is 100 percent deductable as long as your loan is under $1 million. This deduction works for your first two properties, after that you cannot make the full deduction on future properties. Another thing to consider when owning a second home is whether you will be renting the property for any period.
When looking to rent a second home you must follow the 14/10 rule. In order to retain your full mortgage interest deduction you must reside at the second home for 14 days or 10% of the days you rented it out, whichever is more. But any rental income over that 14 day period must be reported to the government.
If you own more than two properties it is in your best interest to keep residency at two of the properties to receive the full deduction on your mortgage interest as describe above.
One thing to consider when looking to purchase more than two homes is in certain situations mortgage interest rates can still be deducted as long as the money is put back into business purposes or investments (check your local state laws regarding this issue).
Mortgage interest tax deduction will total more than $434.2 Billion between 2005 and 2010 making it the third largest tax expenditure for the US government, behind health care and pension plans that large corporations claim. As always, consult a CPA for all tax decisions.
Any thoughts or comments on mortgage tax deductions?
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