As you sit there on the eve of April 15, you vow once again not to wait until the last minute next year to complete your taxes. You look at the pile of paperwork scattered on the table in front of you and the floor next to you and shake your head.
You decide you need to get going and start looking through the tax documents, when the mortgage interest statements catch your eye. This is always a good-sized write-off and you come close to forming a smile on your face when you start reading the fine print on the page. this interest might be deductible. Please consult your tax professional for further advice. What the heck? You thought mortgage interest was always deductible!
Not always. In fact, for a large percentage of California homeowners, at least some mortgage interest is not deductible. For an even greater percentage of California homeowners, mortgage interest is an adjustment for the dreaded alternative minimum tax.
While it was once true that essentially all mortgage interest was deductible, that was changed in the late 1980s to eliminate the personal interest deduction. You could no longer write off the interest on your personal vehicles or credit cards.
Interest is deductible on acquisition debt of up to $1,000,000 on a first and second home only and on up to $100,000 of personal equity debt, all of which must be secured by those residences.
What does this mean? If you buy a house for $600,000 (with a loan of $450,000), the interest would be deductible. You go along for a year and then refinance. The initial loan is now paid down to $445,000 and you take out a new loan for $575,000, all of which is for personal-use items. The $445,000 would be deductible as acquisition debt, $100,000 would be deductible as personal equity debt, and $30,000 would be non-deductible excess personal debt.
This presumes also that the appraised value at the time of refinancing was greater than the new loan amount. Interest on loan amounts in excess of property value are non-deductible.
If your refinance includes dollars for home improvements, the acquisition debt is increased by the lower of the increase in value of the home or the actual dollars spent. Loan dollars can also be allocated to business purposes, which might increase your tax deduction.
These are only a few of hundreds, if not thousands, of tax strategies available to you. See me for further details.
Ken Seamann is an enrolled agent licensed to practice by the Internal Revenue Service and a mortgage loan consultant licensed by the California Department of Real Estate. He can be reached at 925-634-8297. Discovery Professional Services and The Mortgage Market are located at 9030 Brentwood Blvd., Suite E (across from the Brentwood Police Department).