Is Mortgage Interest Deductible?
Some Mortgage Interest May Not be Deductible
Banks are concerned about making loans that will be repaid not about making loans that are tax deductible for homeowners. It is good business for the bank but how is the homeowner supposed to know?
Most homeowners and potential homeowners are aware there are tax benefits associated with ownership. For instance, mortgage interest and property taxes have been deductible expenses from federal income tax since it was enacted in 1913.
The current law provides that homeowners can deduct the interest on Acquisition Debt which is the amount of debt incurred to buy, build or improve a first or second home up to $750,000. The amount of acquisition debt decreases as payments are made and it cannot be increased unless the additional funds borrowed are used for capital improvements.
It is not uncommon for a homeowner to refinance their home for any number of reasons. It could be to get a lower interest rate that would lower the payments or remove mortgage insurance. However, when additional funds are borrowed for reasons beyond “buy, build or improve”, the excess is considered personal debt and the interest is not deductible according to IRS.
Maybe this is not important if the owner is taking the standard deduction because it is higher than the total of the property taxes, qualified mortgage interest and charitable deductions made by the taxpayer. Currently, it is estimated that 90% of homeowners are electing to use the increased standard deduction implemented with the 2017 Tax Cuts and Jobs Act.
A confusing issue that occurs at the end of the year is when the lender reports to the borrower the amount of interest that was paid. While that amount is most probably accurate, the bank doesn’t know if it is qualified mortgage interest for the borrower.
It is the responsibility of the taxpayer to keep track of outstanding acquisition debt and whether part of the balance is considered personal debt.
Another area where it could become important is if the property was lost due to foreclosure, deed in lieu of foreclosure or a short sale. The provisions of the Mortgage Forgiveness Act have been extended through 12/31/20 which exempts the forgiven debt from being considered income and therefore taxable. However, it only applies to acquisition debt. Any part of a mortgage refinance that is considered personal debt could be taxable in that situation.
As an example, let’s say that homeowners originally borrowed $300,000 to purchase a home that they owned for 15 years. During that time, the home appreciated significantly, and they refinanced it twice. Once, they made some improvements and took out cash to pay off personal loans and the second time, it was only a cash out.
| Original acquisition debt |
$300,000 |
| Remaining acquisition debt including improvements |
225,000 |
| Unpaid balance on current mortgage |
$550,000 |
| Personal debt |
325,000 |
In the example above, the personal debt of $325,000 would be considered income on foreclosure and recognizable as income on that year’s income tax return.
If you have never refinanced your home or have refinanced it but never taken any money out of it except to make capital improvements, your unpaid balance in most likely acquisition debt. However, it you have refinanced your home and pulled money out of it for purposes other than capital improvements, those funds may be considered personal debt.
This article is for information purposes. If you are unclear about the current acquisition debt on your home or need advice for your individual situation, contact your tax professional. Additional information can be found in IRS Publication 936, Home Mortgage Interest Deduction.
If you would like any professional residential Real Estate advice, contact us at Paramount Real Estate Services. 1008 12th St. SE Salem, OR 97302 503-851-1645
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Real Estate Numbers Rise for 2013
Existing Home Sales for the nation rose substantially for 2013 giving us the highest numbers that we’ve seen for 7 years. This is encouraging to say the least, however, many factors still plague our country and the health of our economic recovery. The United States needs to see more than the 70,000-200,000 private jobs created each month for us to have a strong economic recovery. It is understood that the national unemployment rate dipped below 7%, but let’s be honest here. Many people have left the workforce causing this number to look more attractive than it really is. Many more people need to get back to work and be able to make attractive wages before our economy is not struggling on life support.
Regardless of how our overall economy is, people still need to find homes to live in. We have witnessed the largest economic correction that the US has had in decades and people still find ways to buy their own home. This is the resilience and creativity of the American people, which is what should be celebrated. People are doing what they can to scratch and crawl their way to lending approval because they know the importance of owning their own home. Taking advantage of the amazingly low interest rates is a strong motivator as well. Allowing interest rates to rise before locking in that rate will cost a home buyer thousands of dollars over the term of their loan or the time they own the home. As interest rates continue to rise through 2014, the buyers who are able to purchase now will be the ones creating more of their own wealth over time. http://data.bls.gov/timeseries/LNS14000000
Mortgage Interest Rates Hit Another All Time Low; however Few will Capitalize
Mortgage rates continue to conquer new territory with a new all time low for a 30 year fixed mortgage! What an amazing time to purchase or refinance. I know there are many people who would love to take advantage of these rates, but they are not in the position to make any moves. What good is the lowest interest rates on record when the financing rules are too tight? Rates could bottom out at 1%, but if people can’t qualify, then it is all in vain.
Fortunately FHA buyers are able to take advantage of these historically low rates. However, in our Salem Oregon market, those buyers only make up 20% of the purchasing power. It is the more qualified purchaser that is having difficulty with financing and therefore is less of a driving force in getting us out of the housing crash. FHA buyers have helped stabilize the market below $150,000 in our Salem Oregon area. Homes priced above that price point continue to see values erode away quickly. Unfortunately there is too much inventory in the higher price point.
It is so overwhelming to think about how our economic system is all tied together with different facets of the economy. What is going to break it open? Housing has historically lead the road to recovery in the past recessions, but how is housing going to recover when jobs are not created? How is housing going to recover when we have so many homeowners underwater on their mortgages and banks are not modifying? How is housing going to recover when we have such a mess with MERS and the overwhelming presence of Shadow Inventory?
There is no one answer to get us out of this mess. Declining mortgage rates are not going to make a bit of difference at the moment. We need solid fiscally conservative leadership on a wide and consistent basis to have a chance. The question is, have we dug our hole way too deep to recover well in the next decade? Judging by the way things are going, the answer seems grim, however; if you can take advantage of the all time low mortgage rates, then by all means; CAPITALIZE!
Real Estate Outlook
It is March 30th and the Federal Government has committed to purchasing Mortgage Backed Securities unti
l the end of this month. This ends, or at least appears to end at the moment, a $1.2 Trillion program to keep Mortgage interest rates in check. Of course, we’ve been spoiled with interest rates as low as the high 4’s over the last few years; however expect things to change if the Fed really does stop purchasing these bad packaged loans. We very well could see them stop buying them for a little while, but if interest rates increase very much, then expect them to continue throwing more money at the program. If the market suffers even more because of the lack of a purchaser for these loans, then the money spent for the program in the amount of over $1.2 Trillion could be considered another wasteful attempt to pump life into the market. Sooner or later, though, this liberal government will need to realize that we can not sustain to continue spending money that we don’t have in order to carry the burdens. They need to understand that unemployment is the driving force to getting us out of this funk that we are in, and we are in one of the largest funks in recent history. This could turn out to be worse than the 80’s if they don’t get things figured out very quickly. It doesn’t take a rocket scientist to understand that spending more money than one is making is a recipe for disaster, and raising taxes in a recession is another recipe for disaster. People who have gotten themselves into too much debt and weren’t able to make their payments is one reason why this country is in the financial mess that we are in now; and you tell me that the governments solution is go to deeper into debt with China?! How ridiculously ignorant do you have to be?