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The deductibility of mortgage interest falls into info two general categories of acquisition indebtedness and home equity indebtedness. Acquisition indebtedness is just that, the amount of loan taken out to acquire the real property. Home equity indebtedness is any additional loan taken out on the real estate up and above the original loan to purchase the real estate. The following information provides the guidelines for deducting interest under each of these scenarios.
Acquisition Indebtedness:
- Acquisition indebtedness is debt incurred to acquire, construct or substantially improve the taxpayer’s main or second home. Note that interest on a third home is considered nondeductible personal interest unless the home is for business or investment purposes and not used personally by the taxpayer.
- Debt must be secured by the home.
- Indebtedness is limited to $1 million ($500,000 for married filing separate or single) for purposes of determining deductible home interest.
- Refinancing of an acquisition debt is considered acquisition debt to the extent it does not exceed the principal outstanding on the loan immediately before the refinancing.
- Additional amounts borrowed to make substantial improvements to the home increase acquisition indebtedness. Any debt above that amount is home equity indebtedness.
Home Equity Indebtedness:
- Home Equity Indebtedness is debt secured by the main or second home of the taxpayer that is in addition to the acquisition indebtedness.
- Deductible interest on home equity debt is limited to the lesser of:
- The fair market value of the home minus total acquisition indebtedness on that home, or
- $100,000 ($50,000 for married filing separate or single) for main and second homes combined.
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