If you refinanced your home recently, you’re not alone. According to Plunkett Research, approximately $1.1 trillion dollars in mortgage loans was refinanced in the United States in 2006. But did you remember to take an increased mortgage interest deduction on your tax return if you were entitled to one?
Here’s how it works. You are allowed to take a deduction on your personal tax return for mortgage interest you pay on a loan that is secured by either your principal residence or a second home, up to one million dollars in acquisition indebtedness. That means mortgages, lines of credit and home equity loans all qualify, as long as they are secured by your home, and you are the primary borrower, and legally obligated to repay that loan.
What you call your first and second homes can be pretty open to interpretation. Pretty much anything will qualify if it has sleeping, cooking and toilet facilities.
The amount you can deduct depends on your mortgage. If your mortgage is more than $1 million, you can deduct all of the interest you pay on the first million, but you can’t deduct any more interest after that. Same goes for home equity loans of more than $100,000. You can deduct all the interest you pay on the first $100,000 of debt, but you can’t deduct any remaining interest. As with most things, there are some tax loopholes around that as well. It all has to do with what you do with the money you get from the loan.
If you have an Option ARM (adjustable rate mortgage), and you have been paying the interest-only option, then theoretically your entire mortgage payment is tax-deductible if it fits under the $1 million cap. Another type of Option ARM featured a ‘deferred’ component, which meant not only could you defer your principal payments, you were also able to defer a portion of the interest due.
However, when it comes to your taxes, taking the deferred option route means your mortgage interest deduction is limited to the interest you actually paid. This makes sense — after all, why should you get a tax deduction for money you haven’t paid out? And you don’t lose anything, either. The interest deduction is merely suspended until such time as those extra interest payments are made.
When the Option ARMs began to adjust (and turn into traditional mortgages), many people found that their new mortgage payments were too high and the rush to refinance into lower payments was on. In most cases, a portion of the refinanced loan was also attributable to catching up on all of the unpaid mortgage interest that had accrued to date.
Once you’ve refinanced and paid off all that accrued interest, your suspended deduction is no longer suspended. So does this mean that the interest is suddenly deductible when you replace it with a new note? Perhaps! As of this moment, the IRS has not yet come up with a strong position one way or the other. Which means if you take this deduction, you’ll most likely get to keep it. As with all tax strategies, but especially brand new ideas like this one, make sure you check in with a tax professional who is clearly versed in the ins and outs of the tax code.
Normally it’s inadvisable to file amended tax returns unless there is a significant missed deduction amount. That’s because amendments are processed at the IRS by hand, rather than through the computer, and the more attention you draw to yourself – the more attention you draw to yourself. There is nothing in the Tax Code that says an IRS examiner can’t review your entire tax return, and not just the amendment you are making. However, in this case, depending on how much money is on the table, it may be to your best advantage to contact your CPA or tax-return preparer and see if you’ve got money on the table that would fit better in your pocket.
Written by Diane Kennedy for www.RealtyTimes.com Copyright