How Much of My Mortgage Interest Can I Deduct?
So just how much interest can you deduct from your home loan? This is a basic tax question that is often answered incorrectly. You may not deduct interest on more than $1,000,000 of home acquisition debt for your main home and secondary residence. Home acquisition debt means any loan whose purpose is to acquire, to construct, or substantially to improve a qualified home. The limit is reduced to $500,000 if you are married filing separately.
Just because you receive a Form 1098 from your lender, it does not mean that you get to deduct 100% of the interest indicated. If you refinance your home in an amount greater than the original acquisition loan, you cannot deduct the interest that is represented by the loan amount that exceeds your original acquisition loan. Also, you can only deduct the interest if you are responsible for the debt, and actually pay the interest. However, the U.S. Tax Court has allowed a joint obligor to deduct their payment of interest on behalf of another obligor, if the payment was made to avoid loss of the property, and the payment was made from the separate funds of the obligor claiming the deduction. This can become important in this economic environment where so many mortgages are going into default.
Further, you can deduct interest on an additional $100,000 of loan amount for a home equity loan. The home equity debt limit is reduced to $50,000 if you are married filing separately. Your deduction for home equity interest may be reduced even below the $100,000 limit if your indebtedness exceeds the fair market value of your home.