Tax Deductions for Real Estate Mortgages Using Interest

The interest you might pay on either a primary residence or a vacation/getaway home (secondary residence), is fully deductible. There are some very stiff limitations on these
deductions, however.

Let's first clarify the difference between an acquisition loan and a home-equity loan. An acquisition loan is simply monies borrowed for the purpose of purchasing a property. Deductions
for acquisition loans can be made for up to $1,000, 000. A home-equity loan is a credit line that is solely secured by the equity the borrower has in a particular property. Deductions for home-equity loan can be made for up to $100,000.

It is imperative that an acquisition loan be used to buy, construct, or significantly improve a property. If you refinance your property for more than the outstanding debt you owe, the excess must be used to improve the home for the loan to qualify as an acquisition loan. If the excess monies are not used for this purpose, it is counted as a home equity loan.

I think an example is fitting for understanding this concept. Let's say you want to take advantage of low mortgage rates and refinance your existing $250,000 loan, you do not plan to use any of the money for home improvements, and your house is assessed for tax purposes at $750,000. Based on your credit and the equity in your house, your lender is prepared
to give you a mortgage loan of $500,000. Because your "acquisition" indebtedness is $250,000, you will only be able to deduct interest on $350,000 of the loan, that is, the acquisition indebtedness plus the maximum $100,000 home equity. The remaining interest is treated as personal interest and is not deductible.

The IRS has ruled that a homeowner does not have to take out a separate home equity loan to qualify for that aspect for the tax deduction.

Blessings to Your Real Estate Investing Business,

Milton B. Yates
www.miltonyates.com