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Can You Deduct Mortgage Interest On A Second Home

    If your second home is your primary residence, then you are entitled to deduct your mortgage interest just like your main home – up to $750,000, if you are single or married filing jointly. Your combined mortgage debt for both your second home and first home cannot add up to more than $1 million if you are single or married filing jointly, or $500,000 if you are married filing separately. If you had a smaller mortgage, say $600,000, the extra $150,000 in debt is totally deductible. If you have one mortgage of $500,000 for your primary residence, and another of $400,000 for your vacation home, you cannot deduct 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. If you are using your home loan to pay down debt with high interest, to buy a car, take vacation, or to pay for school, you cannot claim a deduction for that interest. Your home loan interest tax deduction may make borrowing to buy a house slightly less of a financial burden, particularly if you earn more money and have a larger mortgage. Second mortgages, home equity loans, or lines of credit may also be eligible for the mortgage interest tax deduction, although the typical loans are mortgages.

    Second mortgages used for debt consolidation, covering tuition costs, or funding other financial goals would not qualify for a mortgage tax deduction. For example, the interest on a mortgage used to buy a second home, which is secured by a second home, is deductible, but the interest on a home equity loan used to buy a second home, which is secured by the 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. Since the TCJA, the home equity loans are now included in the principal amount of a mortgage, with interest being 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. If you took out your mortgage after Oct. 13, 1987, and the total amount of your mortgage is above those limits, you may only deduct the interest on the balance of your loan up to the cap. For the third category, interest is deductible if your mortgages were $100,000 or less throughout 2014 ($50,000 or less if married filing separately) and also did not add up to more than your homes fair market value, reduced by mortgages, under 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.

    If your mortgage originated on or before Dec. 15, 2017, congratulations, you are grandfathered in under prior tax treatment, and can deduct the interest on up to $1,000,000 ($500,000 if filing jointly) of the mortgage principal, as long as the loan is used to purchase, construct, or substantially improve your primary or secondary residence. 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. If the total amount of outstanding principal is $750,000 ($375,000 if filing separately) or less, then the entire amount of interest paid on all home mortgages, whether primary or secondary, is deductable, so long as the mortgage is used to acquire debt, as described above under Question One. Under the IRSs findings, only interest paid on second mortgages on acquisition indebtedness–that is, loans used to buy, build, or substantially improve a primary or secondary home–is deductible.

    If you do not use the cash-out equity to pay for the home improvements, the interest paid on this part of the refinancing loan is not deductible. In practice, though, a part of your interest payments can be deducted for borrowers, and taxable at lower rates — or none at all — for lenders. The interest part of a monthly mortgage payment is not the only kind of interest that is allowed to be deducted on an annual tax return.

    For example, a taxpayer who has mortgage principal totaling $1.5 million for a single-family house purchased in 2018 will be eligible to deduct 50% of the interest payments for the lifetime of the mortgage ($750,000/$1.5 million). Currently, the Home Mortgage Interest Deduction (HMID) allows itemized homeowners to deduct the interest paid on up to $750,000 in principal, either on their first or second home. The home mortgage interest deduction allows you to reduce your taxable income for the prior year by the total interest paid on mortgage debt (up to $750,000), which can amount to significant savings come tax time.

    For example, if you took out an $800,000 mortgage to purchase a house in 2017, and paid $25,000 of that interest over the course of 2020, you could likely deduct all $25,000 in that mortgage interest from your tax return. You can deduct points progressively throughout your mortgages term, or you can deduct points in full once, as long as you follow each one of the eight requirements. Generally, the eight requirements are: The mortgage must be for your primary residence, paying points is an established practice in your area, points are not exceptionally high, points are not used to cover closing costs, your down payment is higher than points, points are calculated as percentages of the mortgage, points are in your settlement statement, and you are using the cash method of accounting when deducting fees.

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