The Internal Revenue Service has a keen interest in your mortgage interest. One of the big perks of homeownership is the deductibility of mortgage interest, allowing owners to whittle down the amount of their gross income subject to tax.
That’s the broad-brush rule, but like just about all tax matters, there are exceptions. For those lucky owners of more than one vacation home, for instance, interest is deductible on the mortgage of only one home beside a primary residence.
Moreover, whenever interest either on one mortgage or two totals more than $1.1 million, the overage is not deductible, explains Melissa Labant, a tax specialist with the American Institute of Certified Public Accountants.
Another wrinkle that impacts people in all income brackets, is that any “points” paid up front when buying a home are completely deductible the year of the purchase.
But if you’re refinancing and pay points, the sum “must be amortized over the life [of the new, refinanced] mortgage,” says Labant. (A point is 1 percent of the total mortgage amount borrowed, and paying points up front lowers the rate on a mortgage.)
Confusing, yes. But if it’s any consolation, the IRS needs more help to keep track of who’s taking the right deduction. That’s why starting in 2017, for the 2016 tax year, lenders will have to send the IRS more info than the currently required for the total annual mortgage interest each loan holder pays.
Lenders will be required to include the loan’s origination date — that will help identify refinances from purchase loans, says Labant. And, they must identify the amount of outstanding principal at the beginning of the year, in addition to the address of the property.
Getting the mortgage interest deduction right is important, especially because the IRS, once it finds an error — improperly deducting points paid on a refinance, for example — will recover any tax amount due. Although new rules kick in for the 2016 tax year, mistakes made in the past, once discovered, will trigger a bill.