There is a limit to how much mortgage interest a person can deduct from their taxes each year. This limit is based on how much mortgage interest the person has paid over the course of the year. In the following situations, the average limit has been set. Some people will notice that they have even less freedom. This happens in certain and unique situations.
The specific limits for these people are worked out on a case-by-case basis. But these restrictions are clear for most people, and the situations that need longer restrictions have been noted. Even though there are two different types of mortgages that people can get for their homes, both loans have limits on how much interest can be taken out, though the amounts are different.
The federal government of the United States made these two types of loans based on the situations in which they can be used. This makes it easy for people to know what kind of mortgage or home loan they have. With these definitions, it's easy for a person to figure out what kind of mortgage their bank owes them. First, there is the type of loan or mortgage that lets a person buy or build a home in a certain place with the intention of living there. This is called "debt to buy a home." People use the second type of mortgage loan to fix up or improve an existing home. This kind of debt is called home equity debt.
Overall, the government and the Internal Revenue Service say that a person can't deduct more than one million dollars ($1,000,000.00) worth of interest from their taxes when it comes to home loan debt. This is the standard interest rate limit that has been set for both primary and secondary homes. But the amount is lessened for married people who file their taxes separately. If a married person files their taxes separately from their spouse, they can't claim more than $500,000 (or five hundred thousand dollars).
The limit for home equity debt is set at a different amount. Main homes and second homes can't have a tax deduction for interest that is more than $100,000.00. When a married couple files their taxes separately, the total amount is cut in half. These specific people can't deduct more than fifty thousand dollars ($50,000).
Even with these limits, some people should know that they may not be able to deduct as much interest on their home purchase debt as they would like. This is the case when the fair market value of a person's home is less than the amount of debt that person has. This is figured out on a case-by-case basis and depends on the circumstances. Limits are put in place based on the amount of the person's loan, their filing status, and their adjusted gross income. This is done to make sure that each person gets the right amount of money back.
