Home Equity Loan Center

Deducting Mortgage, HELOC and Home Equity Loan Interest

While preparing this special report on mortgage interest and the IRS, we talked to tax expert Suzzanne Brubaker, CPA, Director of the Financial Counseling Services Group for the Los Angeles offices of Deloitte & Touche LLP, an international consulting firm.

As you read this, it is important to realize that Brubaker spoke about taxes and tax law in general terms. When it comes time to file your own taxes, make sure you check with you own tax preparer, CPA, or tax attorney to make sure that these guidelines apply to your specific situation and that they have not changed recently.

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You can deduct the interest on your mortgages and a HELOC or home equity loans - but only up to a limit. However, if you are at that limit, you probably aren't reading this. You have accountants and lawyers who take care of this sort of drudgery.

You can deduct the interest of any home loans or mortgages for $1 million or less, as long as it is not for more than two residences. If you are paying for a third residence, you are on your own.

For example, if you have a $2 million mortgage on your home, the interest on the second million is not deductible.

However, you don't have to shed any tears for those poor millionaires who cannot deduct the interest on anything over $1 million.

"From what I've seen in my practice," Brubaker says, "people who have the net worth to have multimillion dollars homes also have the cash flow and assets to make sure that all of their interest is deductible. They know that the interest is only deductible on the first million. Therefore, as a rule, they'll have $1 million in debt and no more. They usually have the cash flow to guarantee that their debt won't climb above the $1 million mark."

They also tend to limit the total of their HELOC or home equity loans to $100,000, too.

That limit - $1 million in mortgages and $100,000 in a HELOC or home equity loans - can be on one house or two.

You can have a $1 million mortgage on one house; $500,000 mortgages on two separate homes; a $900,000 mortgage on one and $100,000 on the other, or any combination that adds up to $1 million.

It's the same for the HELOC or home equity loan or loans. The interest on the first $100,000 is deductible, whether it be one or more loans on one or two homes. By the way, a second home doesn't have to be a house. It can also be a some sort of trailer, RV, or even a boat.

One more thing. While interest payments are deductible, the penalties that get added to late payments are not.

It's also important to remember how a mortgage is structured. Most of your monthly payments go toward the interest rather than paying down the principal in the first years of the loan's life. The longer you have a home, the less interest you pay. The less interest you pay, the lower your tax deduction.