The last tax tip addressed mortgage interest for holders of multiple properties, since only interest paid for two properties can be deducted; today we look at how the value of the property influences your deduction.
On your Schedule A, you can only deduct as mortgage interest the amount charged on up to $100,000 of home equity debt. If you have total home equity debt of $150,000 and the interest on this debt for the year is $9,000, you can deduct only $6,000 ($100,000 represents two-thirds of total equity of $150,000, so only two-thirds of the $9,000 interest paid is deductible: $6,000).
If your home equity borrowings exceed $100,000, you may still be able to claim a deduction for some of the excess interest. You can elect not to treat some of the debt that is secured by your residence as home equity debt, based on what you did with the money you borrowed.
Equity debt used to buy investments can be claimed as investment interest. If you use a home equity line of credit to buy assets or supplies for your sole proprietorship or for rental property you can deduct the appropriate interest on Schedule C or Schedule E.
You can also deduct as mortgage interest late-payment fees and charges on a mortgage loan. Sometimes these charges are included in the mortgage interest reported on Form 1098, and sometimes they are not. You should check your annual loan amortization statement to see what is already reported.
A property acquired under a “time-share” arrangement can be considered a second home, and interest paid on mortgages secured by the ownership-interest in the property can also be deducted as mortgage interest.
Finally, interest that accrues on a “reverse mortgage” is not deductible. It is added to the principal of the loan and deducted in the year the loan is repaid.
For all the latest tax tips as you prepare your 2010 returns, check out MainStreet's Tax Center, updated daily!
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