TAX IMPLICATIONS SURROUNDING RESIDENTIAL MORTGAGES IN MASSACHUSETTS:
Q. Are last year’s mortgage escrow payments tax-deductible?
A. You can deduct only the payments applied to your 2005 tax bills; you can’t deduct any payments that were carried over and applied to your tax bills for the current year.
On the other hand, if you purchased a home last year, you can deduct any prorated tax payments you made at the closing to reimburse the seller for advance tax payments he made for year prior.
Q. The IRS bulletin explaining deductions for mortgage interest payments says homeowners can deduct “acquisition debt.” I tried to read the explanation, but my eyes glazed over. Can you help?
A. Acquisition debt is the debt you incur “to buy, build, or substantially improve your home” – The mortgage, minus any principal payments. It is deductible up to a maximum of $ 1 million for a couple filing jointly and $500,000 for a single taxpayer.
You can also deduct interest on a home equity loan of up to $100,000, above your acquisition debt limit, with no restrictions on the purposes for which you use those equity funds. You can deduct home equity interest above that $100,000 ceiling if you use the funds to finance improvements on your home.
One important restriction: Total tax-deductible mortgage debt (notwithstanding the borrower’s acquisition debt limit) can’t exceed the home’s current value. Homeowners who took advantage of the 125 percent of value equity loans some lenders were offering may regret that decision when they discover some of their interest payments aren’t deductible.4
Q. Is mortgage interest deductible on my taxes?
A. Mortgage interest is one of the major deductions available to personal taxpayers.
You can claim mortgage interest up to a certain amount as a tax deduction.
However, to qualify, you must itemize your deductions rather than take the standard deduction option.
For properties purchased after December 15, 2017, mortgage interest on the first $750,000 qualifies for the deduction.
Q. Are points paid by the seller in a home-purchase transaction deductible?
A. That depends. The buyer can deduct the points, even if the seller pays them. The sellers can’t claim that deduction, too, but they can add the points paid to the cost basis of their home, which has the effect of reducing their gain and their potential tax liability. Conversely, buyers who deduct the points paid by the seller must also deduct that amount from their cost basis.
Also: IRS rules allow you to deduct points paid in connection with the purchase of a primary residence in the year in which the points are paid.
The rules for a refinance transaction are different. You have to spread the deduction over the life of the loan. The same limitation applies to points paid in connection with the purchase of a second home.
Of course, there are always exceptions to the rules, and there are two important ones here: If you did a cash-out refinance and used any portion of those funds to finance a home improvement project, you can deduct the points attributable to that portion of the loan in full instead of amortizing them over the life of the loan. If you refinance again, or sell your home, you can deduct the balance of any points you paid but did not claim on the original refinancing.