Qualifications For Second Home Interest Deductions
Homeowners will need to meet specific qualifications and steer clear of select restrictions if they want to be eligible to deduct interest on second mortgages in the current tax year. These guidelines are as follows.
Secured By Your Home
Per IRS findings, only second mortgage interest paid on acquisition indebtedness (i.e., a loan used to acquire, build, or substantially improve a main or second home) is deductible. This debt must apply to the specific home you have used to secure the second mortgage if you want any sums to become eligible for interest deductions.
Below The Total Mortgage Debt Limit
Mortgage interest is currently tax deductible up to the total amount of interest paid in any given year on the first $750,000 of your mortgage, or $375,000 if married filing separately. (Or $1 million for those who purchased homes before 2018 – or $500,000 if married filing separately.)
For tax purposes, second mortgages carry mortgage interest because they use your house as collateral. Your current debt load will impact whether or not you can include second mortgage interest alongside your other homeowner tax deductions.
Grandfathered In With Prior Tax Treatments
Did your second mortgage originate on or before December 15, 2017? If so, you can enjoy the benefit of grandfathered debt. The Tax Cuts and Jobs Act (TCJA) of 2017 lowered the mortgage deduction limit and limited how much you can deduct from your taxable income.
In other words, you’ll find yourself grandfathered into previous historical tax guidelines – aka able to deduct interest on up to $1 million ($500,000 if married filing separately) of mortgage debt. (As opposed to current guidelines, which limit deductible interest to sums paid on up to $750,000 of mortgage interest payments, or $375,000 if married filing separately.)
Be aware that you can’t double dip. You can’t take a grandfathered debt of more than $750,000 but less than $1 million and combine it with a new mortgage that brings you up to the $1 million cap. (See below examples for illustrations.) Under this circ*mstance, you’d be limited to deducting second mortgage interest on only the amount of interest that is associated with your original grandfathered debt.
Used To Pay For Home Improvements
As mentioned previously, the TCJA now requires that home equity loans and home equity lines of credit must be used for home improvements (or home acquisitions). If used for other purposes, the interest paid on the loan may not be deductible on the homeowner’s taxes.
