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Is Mortgage Interest Deductible

    The mortgage interest deduction allows taxpayers who own their homes thereto reduce their taxable income by the amount of interest paid on the loans secured by their primary residence (or, occasionally, second residence). Canadian federal income taxes do not allow the deduction of interest paid on loans secured by the taxpayers personal residence from their taxable income, but homes used in a commercial capacity such as by a homeowner holding a rental residence may deduct the interest, like any other legitimate business expense. Taxpayers may deduct interest paid on mortgages secured by their principal residence (and a secondary home, where appropriate) for loans used to purchase, construct, or substantially improve that property. Interest paid on a home that is not your primary or second home may be deductible when the proceeds from the loan are used for a business, investment, or other deductible purpose.

    The home mortgage deduction allows you to deduct, with limits, interest paid on a home equity loan or a mortgage loan that was taken out to purchase, build, or improve your primary residence (or secondary residence). The home mortgage interest deduction allows you to reduce your taxable income for the prior year by the total interest paid on the mortgage debt you have outstanding (up to $750,000), which can amount to significant savings when it comes to filing taxes. Currently, individuals who itemize their deductions may deduct mortgage interest payments for the first $1 million principal amount of unpaid home mortgage loans on either their primary or secondary residences, as well as the interest paid on up to $100,000 in debt for equity in the home. For tax years before 2018, interest payments on up to $100,000 of this additional debt may be deductible under the rules outlined above.

    Prior to the TCJA, interest on up to $100,000 in home equity loans was deductible on top of interest paid on up to $1 million of principal, and may be used to cover expenses such as credit card debt or school tuition. If a home equity loan was used for personal expenses, like paying down student loans and credit cards, no interest on a home equity loan was deductible. After the TCJA, the home equity loans are now included in the limit of mortgage principal, with interest being deductible only when used for building or improving the qualified residence. Generally, any interest accrued (including initial origination discounts) on reverse mortgages is treated as home equity debt interest and is not deductible.

    For tax years prior to 2018, you also can typically deduct interest on home equity debt up to $100,000 ($50,000 if you are married and filing separately), no matter how you used the proceeds from the loan. Interest on up to $1 million in pre-TCJA mortgages ($500,000 for single filers or married taxpayers filing separately) and interest on home equity loans and HELOCs of up to $100,000 are still deductible. Yes, your deduction is typically limited if all of the mortgages used to purchase, build, or improve your primary residence (and secondary residence, where applicable) total over $1 million ($ 500,000 if using married filing separately) in the prior 2018 tax year. The tax code says the deduction for a home mortgage should be reduced by half for a married individual filing an individual return; in other words, a married person filing separately could deduct interest on up to $375,000 for home purchases after Dec. 15, 2017, and $ 500,000 for homes purchased before Dec. 15.

    Homeowners who itemize their deductions may deduct their home mortgage interest on up to $750,000 in debt from the home purchase (or up to $1 million if the debt was taken out December 15, 2017 or before). If you use proceeds from your home mortgage to buy or carry securities that generate tax-free income (municipal bonds) or buy life insurance or a single-payer annuity (a lump-sum) contract, you cannot deduct your mortgage interest. The interest part of a monthly mortgage payment is not the only kind of interest that you are allowed to deduct on an annual tax return. The home loan interest portion is deductible (under Section 24(b)) for a maximum of Rs150,000 during a financial year, used for property acquisition or construction.

    If you are using home loan for servicing debt with a higher interest rate, buying a vehicle, taking holidays, or paying school fees, then you cannot claim deduction for this interest. If your mortgage is secured by a second home you are renting, you may still be able to deduct interest, but only if you use that home enough days over the course of a year, according to the Internal Revenue Service. If you have one $500,000 mortgage on your primary residence and another $400,000 mortgage on a 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. In addition to the interest paid on a mortgage, you also currently get to deduct the premiums paid on a mortgage loan (as long as your adjusted gross income is less than a certain amount), the points paid on your mortgage, and late fees paid on your mortgage.

    Interest paid on this loan is effectively considered personal interest, which is no longer deductible. If you meet those conditions, you may deduct any payments that you actually made over the course of a year to your mortgage servicer, a state HFA, or HUD for a home mortgage (including amounts shown on Box 3 of Form 1098-MA, Payments for Mortgage Help), but no more than the total amount shown on Form 1098, Mortgage Interest Statement, in Box 1 (Mortgage Interest Received by Payer(s)/Borrower(s)), Box 5 (Mortgage Insurance Premiums), and Box 10 (Taxes for Real Property). The tax deduction also applies if you paid interest on a condo, co-op, mobile home, boat, or recreational vehicle used as your residence.

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