Interest Paid On A Mortgage Might Not Be Fully Deductible

If you own your own home and have a , you likely received a document at tax time from your lender. Known as the Form , it totals the amount of you paid during the last tax year on your mortgage. The IRS must receive a copy of this form from your lender per the tax law.

The IRS solicits information about your loan from your lender, and they are required to provide the amount of the principal balance at the beginning of the year, the date your mortgage loan originated, and the address of the home for which the loan was taken out.

The prior Form 1098 lacked certain information, which made it difficult to determine if interest on the property could be deducted, or if the claimed amount matched what was reported in income or if it was based on mortgage amount that exceed the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”

The IRS defines acquisition debt as the amount of the mortgage you take to buy, build, or substantially improve your primary residence or a second home. Home equity debt is money you take from a mortgage that you need for purposes other than purchasing, building, or improving your home. Acquisition debt over the $1 million limit allows for the use of up to $100,000 of home equity debt, therefore raising the total deduction limit to $1.1 million.

For example, a house with a $500,000 beginning mortgage now has a principal outstanding balance of $300,000. The home has increased to $700,000 and you refinance a new loan of $500,000. While the outstanding balance was paid off, the $200,000 in remaining proceeds were spent on student loans, new furniture, and bills.

For the above example, the acquisition debt remains at $300,000 and home equity debt limit is $100,000. $400,000 of mortgage would qualify for an interest deduction, however, that’s $100,000 short of what was taken during refinancing. This equates to 80 perfect of the interest on the mortgage that is deductible on a tax return.

Form 1098, as previously stated, has recently changed. Don’t automatically assume that the amount of interest you paid on a mortgage is fully deductible.