I have a mortgage for land that I intend to build a home on. Can I take the home mortgage interest deduction?

Answer:

No, you can't deduct interest on land that you keep and intend to build a home on. However, some interest may be deductible once construction begins. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it's ready for occupancy. The 24-month period can start any time on or after the day construction begins. As a qualified home, the interest paid may qualify as deductible mortgage interest, with certain limitations.

Is interest on a home equity line of credit deductible as a second mortgage?

Answer:

It depends. For tax years 2018 through 2025, a deduction is not allowed for home equity indebtedness interest. However, an interest deduction for home equity indebtedness may be available for tax years before 2018 and tax years after 2025. Interest paid on home equity loans and lines of credit in tax years before 2018 and tax years after 2025 is only deductible when you use the proceeds to buy, build or substantially improve your home that secures the loan.

For example, for qualifying years, interest on a home equity loan used to build an addition to an existing home would be deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, would not be deductible. For qualifying years, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

I took out a home equity loan secured by my main home to pay off personal debts. Is this interest deductible, and if so, where do I enter this amount on my tax return?

Answer:

No. A loan secured by your personal residence and meeting certain other requirements is considered home equity indebtedness. For tax years 2018 through 2025, a deduction is not allowed for home equity indebtedness interest. However, an interest deduction for home equity indebtedness may be available for tax years before 2018 and tax years after 2025, with certain limitations. For qualifying tax years, interest paid on home equity indebtedness is only deductible if the proceeds of the loan are used to buy, build, or substantially improve the home securing the loan.

Is the mortgage interest and real property tax I pay on a second residence deductible?

Answer:

Yes and maybe.

Mortgage interest paid on a second residence used personally is deductible as long as the mortgage satisfies the same requirements for deductible interest as on a primary residence.

If the home was acquired on or before December 15, 2017, then the total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main and second home is $1,000,000; or $500,000 if married filing separately. If the home was acquired after December 15, 2017, the home acquisition debt limit is $750,000; or $375,000 if married filing separately.

State and local real property taxes are generally deductible.

  • Deductible real property taxes include any state or local taxes based on the value of the real property and levied for the general public welfare.
  • Deductible real property taxes don't include taxes charged for local benefits and improvements that directly increase the value of the real property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements.
  • Also, an itemized charge for services to specific property or people isn't a real property tax, even if the charge is paid to the taxing authority. You can't deduct the charge as a real property tax when it's a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), a periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).
  • The total deduction allowed for all state and local taxes (for example, real property taxes, personal property taxes, and income taxes or sales taxes) is limited to $10,000; or $5,000 if married filing separately.

Renting out your second residence - If you do rent out your second residence, and you use it personally, additional rules may impact the deductibility of mortgage interest and real property taxes. Please see the publications listed below for additional information.

If I must deduct points over the life of my mortgage, and I have a 30-year mortgage, should I divide the points paid by 30 and enter that amount on Schedule A?

Answer:

No. While you must deduct the points over the life of the loan ratably (equally), you don't divide the points by 30 years. Instead, you divide the points by the number of payments scheduled over the term of the loan (360 monthly payments in the case of a 30-year mortgage) and deduct points each year according to the number of payments you made in that year (less than twelve payments in some cases).

  • If the loan ends prematurely, for example, because you paid it off or refinanced with a different lender, then the remaining points are deductible in that year.
  • Any deductible points not included on Form 1098 (usually not included on the Form when refinancing) should be entered on Schedule A (Form 1040), Itemized Deductions, line 8c "Points not reported to you on Form 1098."

 

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