One of my customers told me that his CPA informed him that there have been changes to the tax code that for borrowers that make over 150K per year are losing some of their tax breaks on home ownership? Is this true? The property is worth 1.3M with a combined loan amount of 1.07M. Can one of the CPA’s in this forum confirm this for me? Before I call out his CPA as a nincompoop. :smile
The amount of interest allowed to be deducted as home mortgage interest is limited to the interest paid on the first $1 million of acquisition debt and to the first $100K of home equity loan debt.
For high income taxpayers, the alternative minimum tax calculations eliminate the home mortgage interest deduction.
Dave,
Thank you for your response. What is considered high income?
Dave, are you saying that if I took out a HELOC for $150k, I would only be able to deduct the interest on $100k?
I read the following on a web site:
“It’s important to keep reliable records of your borrowing to back up the deductions you claim. If you use a home-equity line, carefully distinguish between borrowing that pays for major home improvements and loans used for other purposes. The amount that goes for improvements is added to your acquisition debt, rather than eating away at your $100,000 home-equity allowance. Also, if you use money borrowed on a home-equity line of credit or second mortgage for investment or business purposes, you can choose whether to treat the interest as home-equity interest or deduct it as investment or business interest. If, for example, you opt to count it as investment interest, the borrowing would not reduce your $100,000 home-equity allowance.”
Let’s say for example that I took out a HELOC for $150k. I took $50k and did some remodeling on my primary residence. I took $50k and paid off a car loan, etc. I took the other $50k and put a down payment on a rental property.
I assume I could only deduct interest on $100k, but what about the $50k I put into my primary residence? What is “added to your acquisition debt”, what does this really mean?
Thanks for the help.
No, not quite. Let’s revisit what I said:
The amount of interest allowed to be deducted as home mortgage interest is limited to the interest paid on the first $1 million of acquisition debt and to the first $100K of home equity loan debt.
Home mortgage interest is deducted on Schedule A. If you borrow more than $100K from a home equity line on your primary residence and use a portion of that loan to purchase investment property, then you would want to use the allocation rules to allocate the interest paid on that portion of your loan to your investment property and deduct that interest as investment interest rather than home mortgage interest.
Borrow $100K or less on your home equity line, and the interest is fully deductible regardless of how you use the loan proceeds provided the total debt on your primary residence is not greater than $1 million. Borrow more than $100K and use the loan proceeds for both personal and investment purposes, then you use the allocation rules to maximize the deductibility of the interest paid on the loan.
As I read the rules, the same limits apply to a cash out refinance. Home mortgage interest deduction is limited to the first $100K of the cash out from a refinanced mortgage loan. I don’t know if home equity loan proceeds used for capital improvements on your primary residence are considered home acquisition debt and therefore excluded from the interest deduction limits on the first $100K of the HEL. Perhaps someone will post where to find this in some IRS publication.