The federal government understands that home mortgages are the largest financial burdens many adults will ever assume in their lifetimes. To provide a break (and presumably to encourage people to participate in the real estate market), the Internal Revenue Service (IRS) allow🧸s taxpayers to take deductions on the interest paid oಞn their mortgages.

However, what if you get a second home mortgage? Does it matter what you use it for? Can youꦚ deduct interest in🍌definitely? 

We'll take an in-depth look at the tax implications of taking on a second mortgage, show you how to calculate your 澳洲幸运5官方开奖结果体彩网:deduction on your taxes and highlight various restrictions and pitfal💯ls.

How Mortgage Interest Deduction Works

Typically, 澳洲幸运5官方开奖结果体彩网:mortgage interest refers to interest paid on a mortgage loan for a primary or second home. How much of the mortgage interest that can be deducted depends on how the debt was used, the date of the mortgage, and the amount of the loan. Below are a few of the primary qualifications needed for your 澳洲幸运5官方开奖结果体彩网:mortgage interest to be tax deductible.

Secured Debt

You can deduct your mortgage interest as long as the mortgage loan is secured debt, meaning the home is used as collateral for the mortgage. Most primary mortgage loans are secured by the home. In other words, if you 澳洲幸运5官方开奖结果体彩网:defaulted on the loan or failed to repay the loan, the lendercan repossess the home and sell it to recoup the loaned funds.

Mortgage interest only applies to interest paid on loans that use your home(s) as coll🍌ateral. This includes:

• 澳洲幸运5官方开奖结果体彩网:First mortgage and 澳洲幸运5官方开奖结果体彩网:second mortgage
• 澳洲幸运5官方开奖结果体彩网:Home-equity loan
• 澳洲幸运5官方开奖结果体彩网:Home equity line of credit (HELOC)

Home Equity Loans and Lines of Credit

A home equity loan or home equity line of credit (🎐HELOC) is a type of mortgage in which you borrow from the equity you built up in your home. Your equity is the difference between what you owe on your primary mortgage and your home's ꦓproperty value.

However, the interest on a home equity l🀅oan or home equity line of credit (HELOC) can only be deducted if you use the proceeds to buy, build, or substantially 澳洲幸运5官方开奖结果体彩网:improve the home. In other words, if you borrowed money from your HELOC to pay off credit card debt or medical expenses, you cannot deduct the interest on that debt because it wasn't used for the home.

Categories of Mortgage Debt

The IRS outlines three categories of mortgaღge debt. If your mortgage debt fits into one or more of the three categories, you can usually deduct all of the mortgage interest. These vary depending on when you took out the debt and what the proceeds were used for:

• Legacy debt refers to mortgages that were secured by your home on or before October 13, 1987 (after which current tax rules took effect).
• Mortgage debt of $1 million or less for mortgage debt—or home 澳洲幸运5官方开奖结果体彩网:acquisition debt—taken out after October 13, 1987, but prior to Dec. 15, 2017, that was used to buy, build or improve your home (renovations, repairs, etc.). However, the deduction only applies if the total debt was $1 million or less, or if you're married filing separately, $500,000 or less.
• Mortgage debt of $750,000 or less for mortgages taken out after Dec. 15, 2017, that is used to buy, build or improve your home. The deduction only applies if the total debt is $750,000 or less or if you're married filing separately, $375,000 or less.
  

Please note that the dollar limits for the debt categories apply to your combined mortgage debt for your primary and second home.

Ho🎉w to Deduct Mortgage Interest on a Second Home

To qualify for a mortgage interest deduction with the IRS, the home must be a "qualified home," meaning it's your main home or second home. Mobile homes, house trailers, apartments and boats all qualify, so long as they have "sleeping, cooking, and toilet facilities."

The IRS defines your main home as the home where you live most ♏of the time, while your second home is the home you choose to designate as your second home.

Second Home: Rented Out vs. Not Rented Out

If you have a second home and do not rent it out during the year, it qualifies as a second home even if you didn't live there at any point that year.

However, if you have a second home and rent it out for a portion of the year, you must use the home for a portion of the year. Typically, if you rent out a second home, you need to live there for at least 14 days or more than 10% of the amount of time it's rented out over a year—whichever is longer—to be able to deduct the mortgage interest on it.

More than One Second Home

If you have three or more properties, you can only claim two of them as, respectively, your primary and second homes for a given year. If you happen to sell one of the homes you were claiming in the course of that year, you can then deem another property your primary or second home for the balance of that year.

How Much Mortgage Interest Can You Deduct?

How much mortgage interest you can deduct on your taxes depends on a few factors, including the total amount of mortgage debt and when you took out the mortgage.

After Dec. 15, 2017

You can deduct your mortgage interest up to $750,🐽000 if the loan was taken out after Dec. 15, 2017. Married couples filing separately can deduct $375,000.

On or Before Dec. 15, 2017

You can deduct your mortgage interest up to $1,000,000 in total debt if the loan was taken out on or before Dec. 15, 2017. Married couples filing sওeparately can deduct $500,000.

Home Equity Loan Interest

In the past, you were able to deduct a portion of the interest on a home equity loan or line of cr𒊎♔edit, even if the debt was used for non-housing purposes.

However, that is no longer IRS law. No matter when you took out a home equity loan or line of credit, you can only take the interest deduction if the debt was used to buy, build, or substantially improve your home. In other words, if you use your equity to buy a car, pay bills, or consolidate debt, the interest cannot be deducted regardless of how long ago you incurred that debt.

Example of Mortgage Interest Deduction

If your mortgage or mortgages are used to buy, build or improve your primary and/or second home (making it home acquisition debt) and total $750,000, you can deduct all you've paid in interest.

Let's say you have a 4% interest rate on each of two mortgages that together add up to $750,000; you can deduct all of your annual interest payments of $30,000 ($750,000 * 0.04).

However, if your home acquisition debt is $1.5 million, then you'd only be able to deduct 50% of the total interest you paid on $1.5 million worth of mortgage debt in that year. In other words, with a 4% interest rate, you'd still only be able to deduct $30,000 instead of the $60,000 you paid in interest that year ($1.5 million * 0.04).

At least, this is the general rule. A mortgage calculator can show you the impact of different rates on your monthly payment. The IRS provides a worksheet to determine your actual deductible home mortgage interest.

Second Mortgage Interest Deduction Tax Forms

 As long as you've paid at least $600 worth of mortgage interest, you'll receive a notice from your mortgage holder or lender (it's usually 澳洲幸运5官方开奖结果体彩网:Form 1098) a few months before tax-filing time. Along wi𝓰th the dol꧑lar amount of your annual payments, this Mortgage Interest Statement will also show your paid mortgage insurance premiums and deductible points paid (if you purchased a home that year). Once you have this document in hand, you'll use it to complete your tax return on .

If you happen to have additional debt that exceeds the IRS threshold, you may be able to deduct the interest if those proceeds were used for a qualified expense, such as an investment (also reported on Schedule A) or a business (or C-EZ).

Refinancing and Points

If you refinance any mortgage, including your second one, then you can claim the new loan as home acquisition debt up to the principal of the previous loan. Anything above that will be treated as home equity debt.

In addition, if you pay points on the new mortgage, you can deduct them over the life of the loan. Assuming 澳洲幸运5官方开奖结果体彩网:you refinance a new 30-year mortgage, you can deduct 1/30^th of whatever you paid in points every year. If you haven't deducted all the points by the time you sell or refinance the house (again), then you can deduct any remaining all at once in that year. You'll file the deduction on Schedule A, form 1040, line 12.

The Bottom Line

Typically, you can deduct mortgage interest on a second home, providing it constitutes a qualified home per IRS guidelines. Qualified means it's your main home where you normally live or a second home. The tax rules can get complicated, but if you proceed properly, the provisions can save you thousands of dollars a year. Be sure to consult a qualified tax professional before taking out a second mortgage.