A key benefit of buying a home is to get tax deductions on the mortgage interest and the real estate tax. The mortgage tax deduction can be availed as long as the loan amount for the primary residence and second home is less than $1.1 million. This makes this deduction one of the best ways to trim taxes.
An important date in the US home loan calendar is October 14, 1987. All home loans taken before this date are exempt from new rules. A taxpayer can deduct the full interest paid on these loans, regardless of its size and the purpose for what it was used. Similarly, any refinanced debt incurred before October 14, 1987, is rolled into the total acquisition indebtedness.
For those who are new to mortgage tax, acquisition indebtedness is the money that you borrow to buy, build, or improve your home. The tax code is complex when it comes to this debt. Broadly, it lays down that that you can deduct mortgage interest up to an acquisition indebtedness of 1.0 million on all loans taken after October 14, 1987.
The limit for equity indebtedness is $100,000. This means that you can borrow up to $100,000 of the equity in your home and use it for whatever you want. This again is a huge improvement on the pre-1987 years where you could use this money only for home improvements, medical and education expenses
In the past many homeowners refinanced mortgages on their appreciating properties to draw on their equity. They used this sum to buy new cars or take expensive vacations. This benefit has been withdrawn under the new tax laws. Homeowners can no longer make unlimited mortgage interest deductions when drawing on equity.
A second mortgage, or “junior lien”, allows the homeowner to make use of part of the equity that has built up in the home over time. Getting a second mortgage is very much like taking out your first mortgage in terms of closing costs.
The homeowners can also use the use the equity in their home like a credit card. They can borrow against it as and when they need. The lender will charge interest only on the portion of the equity borrowed against. This then becomes the amount on which the homeowner can claim tax deduction.
