Stan's Point of View
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"You may be faster, smarter, more experienced and have greater resources, but if the other person has greater faith and desire, they will beat you every time" Dan Rawitch

This is the first Series of several in regards to the new tax rules for 2018.

When is Mortgage Interest Tax Deductible for 2018?

Contrary to popular belief, mortgage interest is not always tax deductible.  Here's the inside scoop:
1.  Do you itemize your tax deductions?
You cannot take the mortgage interest deduction if you are taking the standard deduction. In 2018, the standard deduction is $12,000 for single taxpayers, $18,000 for heads of household, and $24,000 for married taxpayers filing a joint return. Please see a CPA for details.

2.  Is Your Home a "Qualified Residence"?
Mortgage interest is only deductible if the mortgage is attached to a "qualified residence". Taxpayers can generally deduct the mortgage interest on two qualified homes:
  • One Primary Residence; and,
  • One Vacation Home
3.  Is Your Mortgage Classified as "Acquisition Indebtedness" or "Home Equity Indebtedness"?
  Your mortgage or home equity line of credit is considered "acquisition indebtedness" if it was used to buy, build or improve a qualified residence.  Generally, you can deduct the interest on mortgage balances up to $750,000 of Acquisition Indebtedness.  Here are two examples:
  • Jane buys her $500,000 primary residence using a $400,000 mortgage. Jane would be able to deduct the interest on the $400,000 mortgage as acquisition indebtedness because (1) the mortgage was to buy a qualified residence; and, (2) the mortgage falls within the $750,000 limit.
  • Janice buys her $500,000 primary residence with cash.  A year later, Janice does a cash-out refinance and puts a $400,000 mortgage on the home.  The funds are not used for home improvements.  Janice would NOT be able to deduct the interest on the new $400,000 mortgage because the funds were not used to buy, build or improve the house.
Three Pitfalls to Avoid
As you can see, it's very important to structure your mortgage in a way where it can be classified as "acquisition indebtedness"! Here are three common mistakes that many people make when choosing a mortgage strategy and deducting their mortgage interest:
  • Pulling cash out of a primary residence to buy a vacation home, and then illegally deducting the interest on that cash-out mortgage (in these cases, it's often better to place a mortgage on the vacation home itself so that it can be classified as "acquisition indebtedness")
  • Paying cash for a home, taking out a mortgage later on, and then illegally deducting the interest on that cash-out mortgage
  • Illegally deducting the interest on mortgage balances that do not qualify as acquisition indebtedness
Distinction Between a Qualified Residence and an Investment Property
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a "qualified residence" for tax purposes. If your transaction involved an investment property, see  IRS Publication 527.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE  IRS PUBLICATION 936.



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Stan Reinford
NMLS Number: 262595
Quaint Oak Mortgage NMLS# 211466
Email:  sreinford@rcn.com
(610) 217-5241
1710 Union Blvd, Allentown PA 18109 (Lehigh Valley Office)
501 Knowles Ave, Southampton, PA 18966 (Delaware Valley Office)
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