Mortgage Interest Tax Shield (Maximize Your Savings)

By James Young on April 22, 2014
Mortgage Interest Tax Shield (Maximize Your Savings)

There are a lot of very good reasons to leave renting behind and join the ranks of home owners. But probably one of the biggest—and most commonly touted—is the ability to get a tax break by deducting the mortgage interest paid.

Benefiting from the Interest Tax Shield

If you are like most homeowners, nearly all of your mortgage payment every month is going toward interest and not your loan’s principle. The good news for taxpayers is that all that interest is deductible, as long as you itemize and don’t just take the standard deduction.

Unless, of course, you had to take out a home mortgage of over $1 million. In that case, you can expect the Internal Revenue Service (IRS) to limit your mortgage interest deduction.

More good news? It isn’t only your home’s first mortgage that paves the way for a tax break via a mortgage interest deduction. If you refinanced to improve your cash flow picture, or secured a home equity line of credit or home equity loan, you also get a tax break. The IRS allows you to take a full mortgage interest deduction for equity loans or credit lines up to $100,000.

Even if you own multiple properties, in most cases you will still be able to fully deduct whatever mortgage interest you pay. For example, if you purchase a vacation home down the line, you will be able to deduct the interest for the mortgage you take out on it.

You can even deduct the mortgage interest for a boat in certain cases, if you use it as a primary or secondary living space. But you will have to prove it has cooking, sleeping and bathroom facilities. There are a few other limitations, so be sure to consult your tax advisor or accountant.

Deducting Points

If you pay points on your mortgage loan in order to get a better rate, you can also claim them as deductions on your taxes in most cases. There are some differences in how you take the deduction, however.

The IRS allows taxpayers to deduct points in the same year they pay them if the following holds true:

  1. The loan is for the purchase or construction of your primary residence
  2. Payment of points is an established business practice for your area
  3. The points you claim fall within the typical range

Different rules apply for homeowners who pay points during refinancing. In most cases, these points need to be deducted over the lifetime of the loan, on a per month basis for 12 months per tax year, rather than all in one year.

Just as with mortgage interest, you can also deduct points if you have a home equity loan or line of credit. The rule here is that the points are deductible in the year the loan is taken out if you then use the money for repairs or improvements to your primary residence, which you have used to secure the loan.

In other words, you can’t deduct points from your home equity loan all in the year you take it out if you use the money to take a vacation or buy a car. If you use the cash for something other than the house, you will need to take your point deductions over the life of the loan.

Similarly, if you take a loan out and secure it with a vacation home or second residence, you’ll need to take your point deductions over the lifetime of the loan regardless of how you use the cash.

Impact of the Mortgage Interest Deduction

It’s little wonder that the mortgage interest deduction is held up as one of the primary advantages of home ownership, at least from a financial standpoint. Forbes estimates that middle-class homeowners were able to save about $615 on average during the 2012 tax season, thanks to the mortgage interest deduction.

In fact, the mortgage interest deduction is the biggest personal tax deduction available to taxpayers. Its popularity with politicians has rarely dimmed and it is often help up as the pathway for making home ownership—and the American dream—attainable for the middle class.

Even so, the larger the home mortgage, the greater the deduction. It is the wealthiest tier of the middle class that comes out ahead with tax breaks from mortgage interest, though every home owner will benefit.

Mortgage interest deductions alone are not going to be the trigger to move more renters into the home ownership arena. The measure is, however, the icing on the cake for those families ready to enjoy home ownership.

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About James Young

My name is James Young- I love red wine, sailing, and playing guitar. I believe that everyday is truly a gift. I'm blessed to live five minutes from the sand in the beautiful city of Long Beach, CA. When I'm not assisting homeowners, you'll find me belting melodies with friends around a campfire, wandering the halls of an art exhibit, or watching ESPN re-runs until the sun comes up. So what am I doing here, you might ask? In a couple of sentences- I'm passionate about empowering first-time and experienced home buyers to make their dreams a reality. Whether it's saving thousands on your home loan, buying your first home, or acquiring your first investment property, I'm always here to help. Don't hesitate to ask questions, and please remember to "share the love"! :) #loveloans #loverealestate #lovelife!