Mortgage Interest Deductibility

As I am working with clients and helping them with mortgage planning, one of the things that comes up often which most people aren't aware of is the deductibility of mortgage interest. The big misconception is that you can deduct all of the mortgage interest paid on your primary and/or second home, up to $1 million in first mortgage plus $100K in home equity.



This is only partially true. Mortgage interest is deductible when it is incurred to purchase, construct or substantially improve any qualified home. The key here is "acquisition indebtedness". Why is this important? Well, it is important because knowing this rule will help you strategize on how much downpayment you should put in a house. Let me give a specific example:



If you purchase a $1mil house, and put 50% down. Your loan would be $500K, and you can deduct all the mortgage interest paid. A few years later, you decide that you need to pull some equity out to do home improvement. So you do a cash out refinance with a new loan amount of $800K. Now, most people think that they can now deduct all of the interest paid on that $800K. Not true! You can deduct whatever was remaining from the original $500K loan, plus another $100K.



Although it may not be obvious, but one small adjustment in your home financing strategy can yield huge different results in your long term financial planning. So, the next time you are ready to purchase a home, look for a mortgage planner who understands the issues and works closely with CPAs and financial planners to ensure your total success.