Mortgage interest question

This is discussed in IRS pub 936:

Both mortgages are deductible. Always confirm anything you think you know with a CPA.

Happy Deducting!

Mortgage interest deduction applies to both a first and second home, so probably no limitations apply, unless homeowner already has another property that he is treating as his second home.

To briefly review: no tax benefit from home mortgage interest deduction unless taxpayer itemizes deductions on Schedule A. (So it's really only the total amount above the standard deduction that is doing any good).

Only interest on home acquisition debt plus up to $100K of home equity debt is fully deductible. If any mortgage obtained prior to 10/13/1987, special grandfather rules apply.

If second home becomes a rental or investment property, interest would continue to be deductible but under somewhat more liberal rules.

-Mark Bole

I'm sure you're right, but publication 936 states this about the definition of a qualified home (i.e. qualified for the mortgage interest deduction):

"Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home."

And then publication 936 has these definitions of first and second home:

"Main home. You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year."

Note that the last paragraph says that a second home can be treated as a qualified home if it is not held out for resale. What if it is held for resale as in Skip's example? As I said, I would think that both mortgages in the example are deductible. So what is the intent of the "or resale" clause above?

-Will

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I don't know, but I speculate that it is trying to address the "property held for investment" situation.

The text might have been inserted as a result of some past court decision, or specific wording in the tax law, which I haven't looked up.

Given the way "home" is defined, it's hard to see how an otherwise-qualified mortgage interest deduction could be disallowed for any second residential property that you weren't already getting the deduction for some other way. In fact if you have multiple properties I believe you can even change the designation of your "second home" as often as you wish during the course of the year (as long as you are not claiming the two second-home properties for the same period of time, i.e. no double dipping).

-Mark Bole

I have been in this situation several times with one variation: For a while, we couldn't decide whether to sell the old home or hold on to it and rent it to tenants. We eventually held on to it. The mortgages on both places were always deductible from day 1. If I am not mistaken, one could move a second time within a short period and then have three homes and three mortgages. Interest on all would be deductible.

I don't think this is true, or is it? Assuming that none of the homes were rental properties or otherwise held in a way that mortgage interest is deductible other than as a home, I believe you're limited to deducting interest on two properties, your main home and another of your choice, during any one time period as Mark pointed out. How's that for a run-on sentence?

-Will

You are probably right. I was assuming that two properties were being held as rental properties, so you would have three interest deductions. If those restrictions applied to rental property, lots of people would be upset.