If you (or a grown son or daughter) are about to buy a house, you should know how the mortgage interest deduction works. Tax savings can reduce the actual cost of owning a home.
* If you itemize deductions on Schedule A of Form 1040, you probably can deduct the interest you pay on a loan used to buy, build, or improve a residence, as long as the loan is secured by the home. Such a mortgage is known as home acquisition debt.
* You generally can deduct mortgage interest for home acquisition debt secured by a primary residence or a second home. However, special rules apply if you rent out your second home for part of the year.
* Altogether, interest you pay on up to $1 million of home acquisition debt is tax-deductible.
* In addition to home acquisition debt, you also can deduct the interest on up to $100,000 of qualifying home equity debt. That’s other debt secured by equity in your main or second home. These tax deductions are generally deductible, no matter how you use the borrowed money.
However, if you are subject to the alternative minimum tax (AMT), you won’t get any tax deduction for interest on home equity debt.
