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First, it's important to know that in
"tax-speak" there are two kinds of mort
II gage debt: home-acquisition debt and
home-equity debt.
Acquisition debt is a mortgage or mortgages you take out "to buy, build or substantially improve" your main or second home.
In general, you may deduct the in. terest you pay on up to $1 million in
II home-acquisition debt. The limit applies
even if you own a second home.
So let's say you took out a home-equity
" loan and you used it to remodel your kitchen for $40,000. For tax purposes, that amount is considered part of your acquisition debt because it was used to improve the home. You can deduct the interest on that new debt as long as your total acquisition debt is $1 million or less.
From the Internal Revenue Service's standpoint, home-equity debt is different.
It is money you borrowed from your equity and used for purposes other than buying, building or improving your home. Only interest paid on $100,000 of equity debt is deductible as mortgage interest. Again, the limit applies even if you own a second home.
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If you used a home-equity loan to pay your child's college tuition, for example, you can deduct only the interest you paid on the first $100,000. (Unless you are subject to the AMT; more on that in a moment.)
If you borrowed more than $100,000
,and used it for purposes other than improving your home, you may still be able to deduct the interest if you used the money to invest in stocks or start a business, although it won't count as mortgage interest paid. But if you spent the extra money on a vacation or a car, the interest is probably not deductible.
RULES FOR AMT PAYERS |
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Things are trickier still for those who must pay the alternative minimum tax, which mainly targets higher-income taxpayers.
Those subject to the AMT don't get many of the write-offs that other taxpayers do. Only interest on mortgage debt used to buy, build or improve a home can be deducted by those subject to AMT.
That means that if someone who pays |
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the AMT spends $20,000 of a home-equity loan on a car, the interest on that debt is not deductible, even if the borrower has not exceeded the $100,000 equity debt ceiling.
"None of the equity debt is allowed for AMT, and that's where people are getting burned," said Claudia Hill, owner of Tax Mam Tax Services.
For example, let's say you had a mortgage for $300,000 and you've paid it down to a balance of $280,000. You refinance that amount of acquisition debt and also take out a $100,000 equity line of credit. You use $60,000 to remodel a kitchen and bathroom.
Now you have $340,000 worth of acquisition debt ($280,000 plus $60,000), the interest on which is deductible for both regular and AMT purposes.
If the remaining $40,000 of the loan is used for something other than substantial improvement to the home, it is deductible for regular taxpayers, but not for AMT payers.
For information, refer to IRS Publication 936, "Home Mortgage Interest Deduction" or consult a tax adviser. | |
