Buying a house in this red-hot housing market comes with tax perks for those who itemize deductions.
KNOW YOUR LIMITS
The interest you pay on the first $750,000 of acquisition debt is tax deductible. Acquisition debt is any debt used to acquire, construct or substantially improve a residence and is secured by the home.
Interest on acquisition debt for a second home may also qualify depending on whether you rent it out. If you rent your second home, you’ll also need to use it yourself. If you don’t use the home, it’ll be considered rental property with a different tax treatment. The rental property mortgage interest deduction also offers significant tax benefits.
LOOK AT THE DETAILS
If you take out a home equity loan, the interest may be deductible. You’ll have to look at the details of how the loan proceeds were used.
Suppose the proceeds were used to improve the house by remodeling the kitchen. In that case, the interest paid on the loan is deductible so long as the principal amount of the home equity loan and any other acquisition debt is below the $750,000 threshold.
But if you used the home equity loan to pay off student loans, for example, the interest isn’t deductible. Your tax professional can provide guidance for your situation.