As noted, generally, you can deduct mortgage interest paid in the tax year for the first $1 million in mortgage debt on either your primary residence or a second residence. If your second home is your personal residence, you are entitled to deduct mortgage interest just like your primary residence – up to $750,000, if you are single or married filing jointly. You cannot deduct mortgage interest on more than two homes, but you may choose a different residence to be your second home every tax year.
You can have just one second home for the purposes of a mortgage deduction, so if you already own a vacation home and take the interest deduction on that, you will need to decide which deduction is better for you. If your second home was purchased prior to Dec. 15, 2017, is used mostly for personal use, and is not a rental property or a commercial property, the answer is ayes; you can deduct mortgage interest for a second home the same way that you would with a first home. If you are using the property as your second home — not renting it — then mortgage interest is deductible up to the same limits that apply to interest on your mortgage loan on your first home. For instance, interest on a mortgage used to buy a second home, which is secured by a second home, is deductible, but interest on a home equity loan used to buy a second home, which is secured by a taxpayers primary home, is not deductible.
If a home equity loan is used for personal expenses, such as paying student loans and credit cards, then no interest on a home equity loan will be deductible. If you used the money to purchase a car, to pay down credit card debt, or for anything other than household expenses, interest is not deductible (learn more about the deductibility of interest from a home equity loan). If you use your home loan to pay off debt with high interest, buy a car, go on a vacation, or pay for school, you cannot claim the deduction on this interest. If you do not use your equity in your home for home improvements, interest paid on that part of the refinancing loan is not deductible.
Because the combined total of the two loans does not exceed $750,000, all of the interest paid on the two loans is deductible. If the total amount of total principal amount owed is $750,000 ($375,000 if filing jointly) or less, then the total amount of interest paid on All loans for a primary residence or a second residence is deductible, so long as the loans are used to acquire debt, as described above under Question One. Taxpayers may deduct the interest paid on mortgages secured by their main residence (and a second home, where appropriate) for loans used to purchase, construct, or substantially improve that property. If your mortgage originated on or before Dec. 15, 2017, congratulations, you are grandfathered in under prior tax treatment and may deduct the interest on up to $1,000,000 ($500,000 if married filing separately) in principal mortgages, as long as the loans were used to buy, build or substantially improve a principal residence or a second home.
The tax code says the deduction for home mortgage interest should be reduced by half for married individuals filing individually; in other words, married individuals filing separately may deduct interest on up to $375,000 for home purchases after December 15, 2017, and $ 500,000 for homes purchased before December 15. For the third category, the interest is deductible if, during the entire year 2014, the mortgage was $100,000 or less ($50,000 or less if married filing separately) and also does not amount to more than the fair market value of the home, reduced by the mortgage, than in the first and second categories. To qualify for the deduction, a mortgage must be a secured debt against a qualified home that you own, and you must itemize the deduction by filing Schedule A. This secured debt must apply to a particular home you used to secure a second mortgage, if you want any amount of it to qualify for interest deductions.
If you had a smaller mortgage, let us say $600,000, then the up to $150,000 in additional debt would be completely deductible. Your current debt burden will affect whether you are able to incorporate the second mortgage interest along with the rest of your home ownership tax deductions. The interest part of your monthly mortgage payments is not the only kind of interest that is allowed to be deducted on your annual tax return. If you have a mortgage, keep good records: The interest you are paying on your home loan can help lower your tax bill.
Second mortgages, home equity loans, or lines of credit can also qualify for a home equity tax break, although the typical loans are mortgages. After the TCJA, home equity loans are now included in a mortgages principal, with interest deductible only when used for building or improving a qualified residence. Interest on pre-TCJA mortgages totaling up to $1 million ($500,000 for single filers or married taxpayers filing jointly), as well as interest on home equity loans and HELOCs up to $100,000, is still deductible. For tax years before 2018, you can write off 100% of interest paid on up to $ 1.1 million in debt secured by your first and second homes, and used to buy or improve that property.
If you have one mortgage on your primary residence of $500,000, and another on your vacation home of $400,000, you cannot write off interest on all $900,000 in your mortgage debt simply because all $900 is owed on the two individual mortgages, which are each under $750,000. If you have a $750,000 mortgage already and you are planning on buying a second home next year, you cannot deduct interest on $750, according to Tim Steffen, senior director of advanced planning with Baird Private Wealth Management. The mortgage interest deduction allows you to reduce your taxable income for the prior year by the total interest paid on your mortgage debt (up to $750,000), which can amount to significant savings come tax time.