Episode 141: September 16, 2009
Debt Loans Credit
By Laura Adams.
A common question I receive is about taking the home mortgage interest deduction. Like this e-mail from Joe in California:
My fiancé bought a home last year but I’m not on the title since my credit was not up to par. Her father entered into the mortgage with her and to my knowledge he does not write off anything for the home. My fiancé does not work and I pay the mortgage. My question is if there’s any way I can benefit from this on my taxes or is it a complete loss for me?
What is the Home Mortgage Interest Deduction?
Joe, thanks for your question. In this show I’ll explain the home mortgage interest deduction and clarify who’s eligible to claim it. When you borrow money to buy, build, or substantially improve your primary residence or a second home, you get a tax break. The interest paid on mortgage balances up to one million dollars is a tax-deductible expense. And interest paid on up to $100,000 of home equity loans or lines of credit is generally tax deductible too.
There are four conditions that must be met in order to qualify to take the home mortgage interest deduction:
You must file your taxes on Form 1040 and itemize your deductions on Schedule A. That means you list each of your tax-deductible expenses like charitable contributions, medical costs, and state and local taxes, instead of taking the default standard deduction. As a side note: You should always itemize your deductions when they exceed the standard amount, because that will lower your taxes. The standard deductions for 2009 are:
You must be a bona fide borrower with an arm’s length relationship to your lender. In other words, if your creditor is a close family member or a friend, taking the interest deduction could be suspect.
Your mortgage must be a secured debt. That simply means that the loan is backed by real estate that could be sold to protect the interests of the lender if you don’t repay the debt.
And the fourth condition to qualify for the home mortgage interest deduction is that you must be legally liable for the loan.
So, Joe--even though you sound like a swell guy--you can’t deduct the interest you’re paying on behalf of your fiancé because you said you’re not legally responsible for the mortgage.
What Homes Qualify for the Mortgage Interest Deduction?
For the purpose of the home mortgage interest deduction, the definition of a “home” includes just about any property with a bathroom, kitchen, and a sleeping area, such as a house, condo, co-op, town home, mobile home, trailer, or boat. If you own a second home, it may also be eligible for the interest deduction. However, there are special rules that you must follow if you rent it out during any part of the year.
A second home that’s also a rental must be used personally by you for more than 14 days or more than 10% of the number of days that the home is rented by others, whichever is longer. For example, let’s say you own a beach house and rent it out from June 1st through August 31st when the weather’s too hot for you to enjoy it. That means you rent out the beach house for 92 days of the year, so 10% of 92 equals 9 days. The 14 day requirement is longer than 9 days, so as long as you use the beach house for more than 14 days of the year, you can consider it a true second home, eligible for the mortgage interest deduction. Otherwise, the beach house would be considered a rental property, subject to tax rules for rental properties rather than for personal residences.
Additional Deductible Fees
In addition to mortgage interest, there are a few more expenses and fees you can include in the deduction, such as late payment fees, prepayment penalties, mortgage insurance premiums, and discount points.
How to Claim the Home Mortgage Interest Deduction
At the end of the year your lender will send you Form 1098, which is a Mortgage Interest Statement. To claim the home mortgage interest deduction, enter the total amount of qualifying interest and fees on Schedule A of tax Form 1040.
Mortgage Interest with Multiple Borrowers
If you buy a home with your spouse and file taxes as a couple, you claim the total amount of qualified mortgage interest on your joint return. However, if you’re married and file taxes separately, or you borrowed money to buy a home with someone who isn’t your spouse, you each get to take a deduction for the interest you paid. If the Mortgage Interest Statement was mailed to another borrower and you didn’t receive one, simply send a document with your tax return that explains how much interest each of the borrowers paid. It’s a good idea to include the name and address of the person who did receive the Mortgage Interest Statement in your explanation.
If you own a home or a portion of a home, be sure to deduct your allowable mortgage interest. It’s important to take every tax deduction that you can because each one lowers your taxable income, which reduces the amount of taxes you have to pay.
If you need some help or motivation to get out of debt, download a copy of my latest audiobook, Money Girl’s 10 Steps to a Debt Free Life. It’s a step-by-step plan to transform your situation and create a financially secure future, for good! Find it at Audible.com, Amazon.com and in the iTunes store.
I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
IRS Publication 936, Home Mortgage Interest Deduction
Instructions for Schedule A
IRS Publication 527, Residential Rental Property