Home Mortgage Issues You Need to Know

Congress is considering tax legislation that would ease the tax burden for taxpayers who are losing their homes to foreclosure. Under current tax law, canceled mortgage debt may generally be treated as income, so the taxpayer not only loses his home, he also faces an unexpected tax bill.

If you're among the thousands who bought a home, refinanced a home mortgage, took out a home-equity loan, or are facing foreclosure this year, here's a quick review of the tax consequences you need to know for planning purposes.

• You may deduct interest on up to $1 million of mortgages on your first and second homes as long as you use the proceeds to buy, build, or substantially improve the homes. You may also deduct interest on up to $100,000 of home-equity debt, regardless of how the money is used.
• Points paid on a mortgage to buy a home are deductible in the year of purchase. Points paid on a refinancing are not currently deductible except to the extent funds are used for home improvements; instead they're deducted pro rata over the life of the loan.
• If you refinance more than once, and in so doing pay off a prior refinancing, the balance of points not yet deducted becomes deductible in the year of the new refinancing.
• If you refinance for more than the balance on the original mortgage (plus $100,000 home-equity debt), your interest deduction is limited unless you use the excess funds for home improvement.

Your home can be a source of significant tax savings, but it can also be the source of tax surprises. Be sure to contact us for guidance before you make important financial decisions involving home ownership.

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