The Mortgage Interest Deduction can be a valuable tax planning tool if you understand how to utilize it effectively.
Qualified Home Criteria
To use the mortgage interest deduction, your mortgage must be secured by a Qualified Home:
- Main Home: This is the primary residence where you live most of the time. You can only have one main home at any given time.
- Second Home: A secondary residence that you choose to treat as your second home.
- Second Home Not Rented Out: If you do not rent out or sell your second home at any point during the year, it qualifies as a second home, even if you do not use it.
- Second Home Rented Out: If you rent out your second home part of the year, you must also use it as a residence for at least 14 days or 10% of the total days it is rented, whichever is longer. Failing to use the home for this period classifies it as rental property, not a second home.
Tax Cuts and Jobs Act Implications
The Tax Cuts and Jobs Act (TCJA) of December 2017 brought significant changes to the individual income tax, including the mortgage interest deduction.
- Home Equity Loan Interest: Interest on a loan secured by your home is no longer deductible if the loan proceeds are not used to buy, build, or substantially improve your home, through 2025.
- Home Mortgage Interest: You can deduct mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. For indebtedness incurred before December 16, 2017, higher limits apply: $1 million ($500,000 if married filing separately).
Mortgage Interest Deduction & Divorce
In divorce situations, when one spouse refinances the marital home to pay the vacating spouse their share of equity, it is termed an "Equity Buy-Out." This refinance is considered acquisition indebtedness, as the borrowing spouse is acquiring the other spouse's share of ownership. Equity withdrawn for purposes other than the equity buyout is classified as Home Equity Indebtedness and may not qualify for the mortgage interest deduction.
Work with a Certified Divorce Lending Professional
Always collaborate with a Certified Divorce Lending Professional (CDLP) during a divorce involving real estate or mortgage financing to ensure you maximize your financial benefits and comply with tax regulations.
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.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association
