Mortgage Deduction Rules

Your home is a major expense. Fortunately, it's also a big tax deduction.
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Expenses associated with your mortgage are the biggest deduction many taxpayers get. Typically, what expenses from your home loan can be deducted is pretty straightforward. There are some limits and other rules that may apply in certain situations, however. Income taxes are tricky enough without worrying about slipping up on the mortgage deduction.

First Mortgage Interest

The primary mortgage deduction comes from deducting the interest paid on your loan. Taxpayers may deduct 100 percent of qualified interest paid on first mortgages for their first or second home. A reduced-interest deduction applies to taxpayers whose total mortgage balances is more than $1 million, however. That means for most taxpayers who don't use an accountant or tax attorney, deducting all of your mortgage interest on noninvestment properties is a safe bet. Mortgage interest is deducted on Schedule A.

Real Estate Taxes

Many people pay their real estate taxes via their mortgage. The lender collects money each month and deposits it in an escrow account. When the property's real estate taxes come due, the lender pays them from the escrow account. Even though the lender makes the payment, the money came from you. You can deduct real estate and property taxes paid from your mortgage's escrow account.

Home Equity Loans

Mortgages taken out after Oct. 13, 1987, that were used for a reason other than to buy, build or improve your home are only deductible if the balance of such mortgages was $100,000 or less throughout the tax year. Mortgages used to buy, build, or improve your home fall under the $1 million balance limitation.

Mortgages From October 1987

All mortgages taken out before Oct.13, 1987, are considered grandfathered debt and are exempt from all balance limitations and use restrictions. Grandfathered debt is counted against both the $1 million total balance limit for deducting first mortgage interest and the $100,000 limit for mortgages for purposes other than home improvement.

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