Can you Deduct Mortgage Interest on a Second Home?

The private mortgage interest (PMI) paid on loan for the second residence is usually deductible if the residence is used personally. The condition for deducting the interest is that the mortgage should satisfy all the requirements on the primary residence. 

Generally, the deductible interests include the local real property taxes and state property taxes. The deduction can significantly reduce the cost of the second home. Home mortgages can be the largest financial burden, and many people do not assume them in their life.

This article will help you have a detailed look at the implications of taxes while taking a second mortgage. We will teach you the calculation of your deduction on taxes and highlight certain restrictions and downfalls. 

So let’s dive in to explore what’s ahead!

Basics for the deduction of mortgage interest

Mortgage interest deduction

The internal revenue service allows the taxpayers to deduct the mortgage interest. It applies to qualified homes only. To understand the deduction rules, first, you need to understand a “qualified home” and the IRS definition of “mortgage interest” and “mortgage debt.”

Qualified home

A qualified home refers to your main home where you live or your second home if you are a starter. Every kind of home having sleeping, cooking and toilet facilities is included in it. You can apply mortgage interest and deductions for that home.

According to the rules, if you have more than two properties, you can only claim two of them as your primary and secondary home. If you sell any one of these homes during the claim, you can deem another property for the balance. 

Mortgage interest and debt

The mortgage interest applies only to the interest that was paid on loans using your home as collateral. The IRS outlines three main categories for mortgage debt. They include grandfathered debt, home acquisition debt, and home equity debt. 

Deductions

The deductions depend upon the type of debt you have. For example, suppose your mortgages are being used for building purposes or improvement in your primary or secondary homes. In that case, you can deduct all the additional interest you have paid for the loan.  

If you paid 4% interest on mortgages that cost $1 million in the home acquisition debt, you could deduct $40,000 of interest from your annual payments. However, there is a restriction in home acquisition debt if your mortgages cost $2 million. In that case, you can only deduct $40,000 instead of $80,000.

This restriction does not apply to grandfathered debt. If the grandfathered debt exceeds $1 million, then you cannot deduct any additional mortgage. But if the cost is less, you can enjoy the deduction of mortgage interest for the remaining amount.

➡LEARN MORE: Mortgage Calculator with PMI Taxes and Insurance

Refinancing

If you plan to refinance any of your mortgages; it might be your second mortgage as well, then you are allowed to claim the new loan as home acquisition debt. The loan remains home acquisition debt as long as the amount equals the principal of the previous loan. Otherwise, it becomes home equity debt.

Points deduction

If you pay points on a new mortgage, you are free to deduct them depending on the life of the loan. If you do not deduct any points before selling or refinancing the house, you can deduct them at once. 

Mortgage insurance premium

It is the amount that the lenders pay to gain the mortgage loan insurance. You can pay this payment simultaneously or make it a part of your monthly mortgage payments. If your adjusted gross income does not exceed a specific limit, then you can easily deduct the amount of premium insurance.

Ensure that you consult an experienced and qualified tax professional for your mortgages before taking out the second mortgage. Taxes are complicated, but the right professional assistance can save you a lot of money.

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