The IRS allows homeowners to deduct some of the expenses related to purchasing a mortgage. How much you can deduct will be dependent on your personal circumstances, such as income level and marital status, and the loan size and final prices of the loan. Knowing the IRS rules on mortgage tax deductions, can help you maximize the tax savings your home supplies.
Mortgage Interest Tax Deduction
The IRS allows you to declare all mortgage payments as long you submit a Form 1040 and itemize the deductions on Schedule A. If you have a 30-year, $150,000 mortgage with a 6.5 percent interest rate, for instance, you will pay over $41,300 in interest payments throughout the life of the loan, which you can deduct from the income tax.
Mortgage Factors
A mortgage point is prepaid interest borrowers pay to reduce their mortgage interest rate. Each point costs 1 percent of the amount of the loan and reduces your interest rate by anywhere from 1/8 to 1/4 point. You may either declare some of the points paid annually over the life of the mortgage (the normal method), or declare that the entire price of mortgage points from the year you paid them. To calculate the part of factors deductible for any specific year, divide the entire cost by the term, in years, of your mortgage. If you pay $4,000 in points on a 10-year mortgage, you also can deduct $400 annually. For the IRS to permit you to declare the entire price of points in 1 year, you need to meet nine prerequisites detailed in IRS Topic 504 (see Resources). As an example, the IRS requires the payment of points to become an established banking practice in your area, and the mortgage must be secured by your main residence.
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
When a lender forecloses on your mortgage, the foreclosure sale price of your house might not cover what you owe. Your lender may forgive the equilibrium, however the IRS views canceled debt because of taxable income. The Mortgage Forgiveness Debt Relief Act allows you to exclude canceled or forgiven debt from the income tax. To qualify for this relief, the overall canceled debt shouldn’t exceed $2 million, the house must be your main house, and the reason behind foreclosure must be a fall in your house’s value or personal financial difficulties.