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3 big tax breaks for Americans who go into home debt

Americans have again dived into the deep end of the personal debt pool

"Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse," write Michael Corkery and Stacy Cowley in today's New York Times' DealB%k column.

The $12.73 trillion in debt reported in the first quarter of 2017 is comprised mainly of housing-related borrowing. But there is a bit of good news here.

Housewarming cupcakes_Danl Lurle via Flickr
Here's hoping that the new residents find being homeowners as sweet as these house warming cupcakes. (Photo by Danl Lurle via Flickr CC)

While mortgage debt represents 68 percent of households' total debt, that's down from 73 percent during the same period nine years ago. In fact, housing's share of personal debt has fallen back to 2003 levels. (The household debt figures are not adjusted for inflation, notes the newspaper.)

Even more comforting, the broader economic picture looks far less precarious than it did in late 2008, according to Corkery and Cowley. "The amount of monthly income that Americans must spend paying off their debt is smaller, and employment is flush."

Possible tax changes for home tax breaks: Will U.S. debt continue along this path, particularly when it comes to loans for residential real estate?

Maybe not if tax reform under the Trump Administration makes major changes to how the Internal Revenue Code treats residences. The outline released April 26, however, is woefully short on details.

As for housing, it is mentioned in just one bullet point:

  • Protect the home ownership and charitable gift tax deductions.

It's unclear whether that means all current residential tax breaks, or just the biggie, deductible interest on most home loans.

That uncertainty is frustrating some lawmakers on Capitol Hill who must flesh out any tax cuts or code overhaul. "To date, they have not given us very much — one page — I've had drugstore receipts that were longer," said Sen. Ron Wyden of Oregon, the Senate Finance Committee's ranking Democrat. "The clock is really ticking down, and they need to get us some specifics soon."

Existing home debt tax breaks: Homeowners, current and prospective, also would like to know what, if any tax breaks they will get along with their residences.

As for the debt portion or the home owning equation, here's a look at the three big home-related tax breaks that a residential property owner homeowner can claim.

1. Mortgage interest 
The loan you get to buy, build or improve your main home is known in tax speak as acquisition debt. And for homeowners, especially in the early years of owning the residence, the biggest tax break comes from the interest paid on this acquisition debt.

All of that mortgage interest is deductible as an itemized expense as long as the loan is not more than $1 million. If you can get a lender to help you move into that multimillion-dollar mortgaged mansion, the Internal Revenue Service will limit your deductible interest.

What if you happen to also own a vacation home? Interest for a loan to buy a second home also counts as acquisition debt and therefor is fully deductible, too, as long as the total mortgages on all your properties don't exceed the $1 million limit.

Also note that your second home — or your first one, for that matter — doesn't have to be the traditional structure in a fenced yard to qualify for the mortgage interest deduction.

A home, for tax purposes, that house or a condominium, a cooperative apartment, a mobile home, a boat, a recreational vehicle or any similar property that has sleeping, cooking and toilet facilities.

2. Refinanced home debt 
Although home interest is deductible, no one likes to pay a higher interest rate than they have to. If you refinance your home loan at a lower rate the new mortgage's balance also is treated as acquisition debt up to the balance of the old mortgage.

3. Home equity loan or HELOC interest 
If you use your residential property to obtain extra cash, interest on that added home-related debt also offers in many cases another tax break.

The interest on a home equity loan, whether taken out separately or as part of a refi, or a HELOC, aka home equity line of credit, is deductible as long as the added debt is $100,000 or less.

Be careful, though. Your interest deduction here could be limited if the combined balances of the debt you go into to buy the home (known as acquisition debt) and the home equity debt happen to be more than your home's fair market value at the time you take out the home equity loan/line of credit.

You can read more about more home-related tax breaks in one of my earlier posts.

IRS Publication 936 has details on home mortgages, including a nifty flow chart to help you determine whether all or just some of those interest payments are deductible.

Schedule A and its instructions also have more on claiming your home's interest payments, as well as the other big home-related expense: property taxes.

Home sweet home for most, not all: The hubby and I have owned five primary residences, the latest one being the casa we call home here in Austin, Texas. We've also refinanced three times over the years.

So as you might surmise, we're a big fan of not only owning our own place, but all the tax breaks they have provided over the years.

But homeownership is not for everyone. And even if you do find that buying a house is the best move, be sure you don't overextend yourself.

Home loans typically are considered good debt as compared to revolving debt such as owed on a credit card. But borrowing more than you can afford, whether it's to buy a house or a totally new wardrobe, can be dangerous.

So do your budgetary and home buying homework.

Don't just buy for potential tax breaks. They might not always be there!

And when you do get the keys to your new place, enjoy! It's not an investment. It's where you and your family will live and make some great memories.

You also might find these items of interest:




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I never understood why the taxpayers must subsidize second homes for anyone. This luxurious gift is especially egregious when life-saving medical expense deductions are increasingly limited.

But it is increasingly clear the GOP's "tax cuts" are only for those at the top of the heap, while Americans who must labor to live bear an ever increasing tax burden.

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