Some professionals, especially singles, may be tempted to lease properties in Potomac, Bethesda homes, or Arlington, instead of buying real estate in northeast Washington D.C. However, the ability to deduct mortgage interest should be a huge incentive for people to invest in qualified homes in Maryland, Northern Virginia, and the District of Columbia.
Interest paid on mortgages for real estate can be deducted on the first $1 million in mortgage loans for the first and second homes combined. For those with a million dollars involved, that would mean a much-needed $50,000 deduction.
For some homeowners, the deductible amount can be significant. First of all, interest payments can be deducted on the first $1 million in mortgage loans for a “qualified home.” A qualified home actually includes the combination of a first and second home, which must have a kitchen, sleeping quarters, and a toilet. Houseboats, trailers, and even stock in many of the cooperative housing corporations around Washington D.C. all count as a “qualified home.” There are lots of stipulations about the cooperatives, and they are worth investigating.
Benny L. Kass explains the IRS “acquisition indebtedness” in a recent series of articles entitled, “Mortgage Interest: What Can You Deduct at Tax Time?” According to this limitation, the mortgage must have been taken out after October 13, 1987 in order to buy, build, or substantially improve a qualified home.
Kass’ example states that if, “In 2000, you bought a condominium for $300,000 and obtained a $240,000 loan. Based on the rapid appreciation in the years after you bought, your unit is now worth $500,000, even if it has lost value recently. You still owe $230,000. You refinance and get a new loan in the amount of $400,000. Your acquisition indebtedness is the amount you owed on your old loan, $230,000.” Homeowners can deduct the interest on the $230,000 plus any money borrowed to upgrade the home.
Even if homeowners incur acquisition indebtedness, they may also deduct interest on any home equity loans. Homeowners can deduct interest on up to $100,000 of home equity debt. When the home in the above example was refinanced for $400,000, the interest on the additional $100,000 would also be tax deductible.
Other deductions may be taken for points and private mortgage insurance. It all adds up in favor of the real estate owner.
Feel free to contact Eric Stewart of Llewellyn Realtors at (301) 424-0900 for more information about real estate in the metropolitan areas.
