We all buy homes on mortgage basis and this helps in saving a lot. We tend to pay a lot in the form of interest but what do we get in return? Here’s the answer, a mortgage tax deduction.
A key benefit for the new home owner wherein we can save a lot if our primary and the secondary homes are less than $1.1 million in cost. 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. Any loan before this date is free from the new rules. Full deductibility is allowed on such loans. Similarly, any refinanced debt incurred before October 14, 1987, is rolled into the total acquisition indebtedness.
The jargon is quitesimple, 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 million on all loans taken after October 14, 1987.
The limit for equity indebtedness is $100,000. You can now borrow up to $100000 of equity on your home and use it for any purpose. 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.
Refinancing mortgages was the best way to draw equity on your appreciating property. You could use the money for literally anything you wanted, but now the rules have changed.
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. It is similar to the first mortgage.
The advantage is that you can use your home to draw equity on your home to a certain limit and then use it. You will be charged interest only on money that you have withdrawn and not the rest. Even the tax is on used capital only. Aren’t things becoming much simpler these days? Just know what you are doing and do it within the law.
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