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Mortgage Payment Deduction

  Sanjiv Gupta CPA  Published 
Mortgage Payment Deduction

There are many types of mortgage loans. The thing that you should be concerned about regarding mortgage on a property is if the mortgage interest is tax-deductible or not, and if it is, then how much of the total interest is deductible. In order to clearly understand mortgage interest deductions, you first need to understand the different types of mortgages and the different criteria to determine the mortgage interest deductible.

Various types of housing mortgages

The main types of housing mortgages include home mortgage, second mortgage, home equity loan or a line of credit. All these types of mortgages have interests. Any interest that you pay for these home mortgages is known as home mortgage interest or property mortgage interest.

Based on the kind of mortgage, you will be able to calculate how much interest you will need to pay and how much can be deducted. There are different terminologies involved in this and you need to understand all of it first.

The Grandfather Debt

The first term that you need to understand is the grandfathered debt. The name itself is not very descriptive. Perhaps, the only thing that you can judge from this term is that it is a long-standing debt. In practice, any debt or mortgage was taken before October 13, 1987, is referred to as grandfather debt. Contrary to popular belief, having a grandfather debt can be very beneficial for a tax deduction.

There are three different conditions following which you can completely deduct the interest. The entire interest is deductible if you are considering a grandfather's debt. This is the key benefit of grandfather debt.

The second condition is when you are not considering a grandfather's debt, but a mortgage loan has been taken to build, improve or buy a home, and the total amount of debt (including other grandfather debts) does not exceed a million dollars. In this scenario too, you can have the complete interest amount deducted from taxable income.

What is secured debt?

As mentioned earlier, home mortgage loans can be of different types. The secured debt helps to provide security only if the mortgage is secured. A secured debt ensures the following three things, where you sign for a mortgage, real estate or if there are three parties involved for providing the loan, which is known as a deed of trust:

  • It naturally gives you the ownership which helps you to qualify for home security matters and enables you to make payments related to debts.
  • It provides security if you fall under the default list and your home can gratify the debt.
  • Lastly, the entire procedure is recorded under the laws that are essential parts.

To put it in simple words, you can keep your home mortgage as secured debt only if you keep your home as a security for the repayment of the amount borrowed from the lender. In case you fail to clear the debt, your home, which has been pledged as security, would serve as a means of payment to the moneylender to clear the debt. This procedure for the home mortgage loan is termed as secured debt.

What if you don’t have secured debt through a home mortgage?

When a debt is not secured through your home, then it is entirely due to the right to have possession for the property which belongs to the moneylender unless the debt is owed by the borrower.

Wraparound mortgage and its utility

This method is more commonly known as “Wrap”, and it is termed as secondary financing mostly associated with purchasing real estate property. The seller finds a buyer and extends the mortgage amount, which gets wrapped around, and then the buyer is expected to pay the amount for mortgage apart from purchasing the property at a specified amount. So the entire amount gets divided between the buyer and the seller. However, this procedure does not ensure secured debt from at any point.

Things To Know About Qualified Home Mortgage Interest

In order to enjoy some deduction for the home mortgage interest, the debt carried by you must be defended by a qualified home. The qualified home is your home where you reside and this includes second home. All these may cloud your mind but with all the documentation available, it is simple to understand. Generally, a home is where you live, and it has other important attachments, such as a mobile home, condominium, boat, etc. Similarly, any property that allows you to provide sleeping facilities, toilets or even cooking is considered as a home.

When we consider a home mortgage, it can be cut down or reduced only if the loan was expended towards a business purposes or any other investments that are lawfully fit for the deductible method. Other than that, the loan would be considered entirely for personal means and so no deduction can be done based on that.

This is entirely a complex procedure with strict laws and one must know all the details that are involved in this process. It is very difficult for a common man to remember and manage all the tax procedures by following complex procedures. The Taxpayer Advocate Service could be a great relief in this regard because it is the association that you can look up to, in order to get accurate advice for mortgage interest tax deductions. This is an organization working independently, a body within IRS that takes care of taxpayers issues and at the same time, it also does the job to protect the right of taxpayers.