- The IRS does not allow you to deduct the mortgage interest you pay on an unlimited number of homes. The deduction is only available for your qualified homes, which consist of the main home, which serves as your principal residence during the year, plus one additional home that you use for personal purposes. Commonly, taxpayers are able to deduct the mortgage interest on a vacation home even though they only use it a few weeks a year.
- If you own three homes, the tax law does not let you choose the home to treat as your main home. Your main home is always where you live for most of the year. However, you do have flexibility in choosing which of the other two homes to treat as the second qualified home. As long as both homes can qualify, you are free to choose the one that offers the highest level of tax savings, which generally is the home you pay the most interest for. Another benefit to this flexibility is that your choice in one year is not binding for the next. In other words, if you have a variable interest rate on one of the mortgages, you can choose a different home each year depending on how high interest rates are.
- For purposes of the deduction, the IRS includes the interest on a home equity loan obtained after the initial mortgage. Stricter limitations apply on the amount you can deduct, however. Only the interest that you pay on the smaller of $100,000 in loan balances or your equity in the home is deductible. Generally, your equity is simply the fair market value of your home less the outstanding balance on the original mortgages.
- The mortgage interest deduction not only includes the interest payments you make each month when paying your mortgage, but also includes the amount of points you pay to initially acquire the loan. Your loan documents may refer to points as loan origination fees, maximum loan charges or even a loan discount. But regardless of what they are called, they are still deductible and considered prepaid interest. Usually, you must deduct points ratably over the life of your mortgage for any home that does not qualify as your main home.
Two Homes Only
Choosing Second Home
Home Equity
Points
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