As the tax filing deadline looms, many Americans continue to prepare and file their annual income taxes. For the 86 million taxpayers who own their homes and have a mortgage, there are several different tax deductions they can take advantage of, including deducting their mortgage interest and the insurance premiums of any private mortgage insurance. The IRS allows taxpayers to deduct interest from two types of mortgage loans.
The first qualifying mortgage is one taken out for purchasing, building or substantially improving the taxpayer’s primary or secondary property. The interest paid on these mortgages can be deducted, although there are limits. The principal balance limit on this type of mortgage is $1 million for most taxpayers, although those who are married but are filing separately are limited to $500,000.
The second type of mortgage is classified as home equity debt. It includes any mortgage debt that is used for anything other than purchasing, building or improving a property. This includes using a mortgage for debt consolidation or any other expense. The limit here is a flat $100,000. The amount of this debt also cannot be greater than the difference between the amount of debt owed for the purchase of the property and its fair market value.
It’s important to note that refinancing does not change how the IRS classifies a mortgage. It is still considered a home acquisition mortgage, with the principal balance changing from the initial amount to the new refinanced balance.