Your Last Great Income Tax Write-off

According To Morgan Stanley…
"The decision to invest in a home is not only a practical decision in terms of meeting lifestyle and family needs, it can also serve as a means of accumulating wealth through property appreciation.

Additionally, with the deductibility of mortgage interest and the special treatment of capital gains there are unique benefits associated with leveraging an investment that is a relatively stable asset.

Thus, a properly financed home can enhance an individual's overall investment strategy."* www.msdwhomeloans.com - 'Liability Management for Wealth Creation'

The deductibility of home equity interest provides a substantial opportunity for sophisticated tax planning. The interest rate on a home mortgage is generally much lower than credit card rates of 18% to 21%. It's a financial slam dunk to pay off that debt with your home equity. Not only would you pay a lower rate, but you could also write off the interest as a tax deduction. (If you itemize deductions on your 1040)

Make All Your Interest Tax Deductible
Consider, interest is the fee you pay for the use of someone else's money. However, can't you in effect, lower that fee if you can write it off as a deduction on your taxes? The problem is that under the current tax laws you can't deduct interest on credit card loans and personal loans (consumer debt). Generally, that means you must find a way to turn the interest (fee) into mortgage debt.

Consider: If you're in the 28% tax bracket and you pay $10,000 of interest on your home, $2,800 of those payments can come from the IRS in the form of income taxes you don't have to pay. (If you itemize deductions on your 1040)

How Much Can You Write-Off
Interest deductions on a first mortgage are straightforward. They apply to both first and second homes. Generally, you can deduct all of the interest you pay on a first mortgage each year, up to the smaller of:

The total cost to buy or build your home plus make any improvements,
Or $1 million ($500,000 for a married individual filing a separate return.)

Remember, the cost of your house includes more than the amount paid to the seller. It also includes appraisal fees, title search, title insurance, transfer taxes, broker's commissions paid by the buyer, survey fees, bank or lender fees, legal fees, mortgage taxes, and any other nondeductible closing costs such as postage. It could also include the purchase of additional land adjacent to your home.

Deductibility Home Equity Loans
Interest on home equity debt is deductible to the extent the debt does not exceed $100,000 (or $50,000 for a married individual filing separately). Technically, the limit is the home's fair market value in excess of any outstanding home acquisition debt, with a $100,000 maximum.

The beauty of home equity interest: How you use the money is irrelevant. Money can be borrowed for vacations, parties or to pay off other debt.

To understand the mortgage interest deduction rules, read IRS Publication 936.