A Deeper Look at the Mortgage Interest Deduction

The Mortgage Interest Deduction May Be a Great Tax Planning tool as long as you understand what you are working with.

Qualified Home

In order to use the mortgage interest deduction, the mortgage must be secured by a Qualified Home:

Main home.  You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home.  A second home is a home that you choose to treat as your second home.

• Second home not rented out.  If you have a second home that you don’t hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You don't have to use the home during the year.
  Second home rented out. If you have a second home and rent it out part of the year, you must also use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you don't use the home long enough, it is considered rental property and not a second home. 

As a reminder, the Tax Cuts and Jobs Act passed in December 2017, made several significant changes to the individual income tax including the mortgage interest deduction.

• Home equity loan interest. No matter when the indebtedness was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren't used to buy, build, or substantially improve your home thru 2025.
  Home mortgage interest. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

Mortgage Interest Deduction & Divorce

When one spouse is required to refinance the marital home in order to pay the vacating spouse their share of equity, it is referred to as an "Equity Buy-Out." This mortgage refinance will be considered acquisition indebtedness because the borrowing spouse is 'acquiring' the other spouse's share of ownership. Any equity taken out of the home for any other reason other than the equity buyout may be considered Home Equity Indebtedness and may not currently qualify for the mortgage interest deduction.

Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.

This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.

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