Deducting Interest on Your Taxes

This week I would like to talk about the Interest or Interest Paid deduction, which is recorded on the Schedule A.  The most common interest is home mortgage interest.  A home mortgage loan is secured by your main home or a second home. It includes the first and second mortgage on the purchase of the home, a home equity line of credit, and the loan from a refinance. A home can include a house, condominium, co-operative, a mobile home, house boat, or similar property.  To be considered a home it must include sleeping space, a toilet and cooking facilities.  So, if you have a boat and you live in it 3 months out of the year and it has a bed, a galley, and a port-a-potty, you can deduct the interest on the loan as a second home.  Keep in mind the loan has to be to purchase, build, or improve your home.  If you take equity out of your home to buy a car, only the percent of interest that was for your home can be deducted.  A travel trailer and RV can also be considered a second home. 

Sometimes people buy a home and the previous owner finances the purchase.  This means that instead of going to a bank and getting a mortgage loan the buyer makes payments to the old owner.  In this current economy it is becoming more common.  A mortgage lender is required to report the interest paid by the homeowner to the IRS, but if you have owner financed a home you can still deduct the interest.  To do this you must put the name, address, and social security number of the person you are paying on your Schedule A.  If you don’t, the IRS can disallow the interest deduction.

One other thing considered interest paid is points paid to the lender.  When you buy a home you are often charged points that show up on the settlement statement.  Points are fees paid to the lender to borrow money.  They are tax deductible over the life of the loan.  That means if you have a 30-year mortgage you can deduct 1/30 of the amount charged for points every year.  It is almost pointless.  But of course every little deduction can help.  If you get a loan to make improvements to your home and you are charged points on the loan, you may be able to deduct the points in the year you make the improvements. 

The last type of interest that is deductible is investment interest.  Investment interest is interest paid on money you borrowed for property that is held for investment.  It doesn’t count for passive investment activities or for activities that generate tax-free income.  Generally, if you have paid investment interest it has been paid through an investment company such as Merrill Lynch or Smith Barney and will be reported on your annual statement.  If you have borrowed money for investment purposes be sure and tell your tax advisor so they can determine if it is a deduction. 

There are a few more things to consider when you are deducting your insurance.  Visit www.avoidbeingaudited.com to learn more!