You already know that you may deduct the home mortgage interest that you pay each year as an Itemized Deduction on your Form 1040-Schedule A. But, did you know that the deduction has been limited to the first million dollars of the loan? So, if your mortgage was over one million dollars, you lost the deduction of the interest paid on the portion above one million.
There are two types of home mortgage loans, one known as “acquisition indebtedness” which is used to acquire, construct or substantially improve a residence.” And a second type known as “home equity indebtedness” which is any other debt secured by the home. Both types of loans must be secured by your residence to qualify. Deduction of home mortgage interest on “acquisition indebtedness” is limited to one million dollars, and the second type, “home equity indebtedness,” is limited to $100,000.
Good news: “The IRS has ruled that indebtedness incurred by a taxpayer to acquire, construct or substantially improve a qualified residence can constitute “home equity indebtedness” to the extent it exceeds $1 million, up to an excess of $100,000 (Revenue Ruling 2010-25).” “This allows the taxpayer to deduct interest on the first $1.1 million of the loan - $1 million as acquisition indebtedness and $100,000 as home equity indebtedness” (Journal of Accountancy). This IRS ruling contradicts two earlier Tax Court cases.
So, if you have a mortgage of more than one million dollars this ruling allows you a larger allowable home mortgage deduction on your tax return. You may treat the first $100,000 in excess of the $1 million limit as home equity indebtedness. Interest paid on any amount above $1.1 million is nondeductible personal interest.
To read more about limits on home mortgage interest deduction see IRS Publication 936, Part II.
