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    4. Can I deduct my mortgage interest and any points I paid?

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    Article

    Can I deduct my mortgage interest and any points I paid?

    Jan 11, 2022

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    A monthly mortgage payment is probably one of the biggest expenses a person can have, but there may be a tax benefit to help ease the burden

    Home mortgage interest is any interest that is paid on a loan that is secured by the home itself, which also includes a second home. This means that the mortgage loan is financially backed by the home as collateral. Home equity loans, while secured by the home, need to be used to buy, build, or substantially improve the home in order to be deductible.

    The first steps in determining whether or not you can deduct mortgage interest are if you file a Form 1040 and report itemized deductions on Schedule A and you also must have an ownership interest in the qualified home. If you meet both of these qualifications, then you will be able to deduct the interest paid on the mortgage loan.

    However, the amount of interest that can be deducted may be limited. For mortgage interest to be fully deductible, all mortgages must fit into one of the following categories at all times during the year:

    • Mortgage taken out on or before October 13, 1987 (Grandfathered Debt)
    • Mortgage taken out after October 13, 1987, and before December 16, 2017, but only if the total mortgage debt, including grandfathered debt, totals $1 million or less ($500,000 or less if Married Filing Separately)
    • Mortgage taken out after December 15, 2017, but only if the total mortgage debt, including grandfathered debt, totals $750,000 or less ($375,000 or less if Married Filing Separately)

    The mortgage interest deduction will be limited if the amounts exceed the figures above. Also, for the second and third categories, the limits apply to the combined mortgages on your main home and second home.

    Points are certain charges that are paid by a borrower in order to obtain a mortgage. It can be possible to deduct the full amount of points in the year paid; however, they are generally deducted ratably over the term of the mortgage. In order to determine the proper treatment there is a test to apply to the terms of the loan and the points paid. The loan on which the points are paid must be used to buy, build, or substantially improve the home.

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    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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