Hi,
We are planning to take out a mortgage of $300,000 on our house (currently paid off) in order to buy a second home overseas. Is the interest fully tax deductible?
Thanks, Gary
Hi,
We are planning to take out a mortgage of $300,000 on our house (currently paid off) in order to buy a second home overseas. Is the interest fully tax deductible?
Thanks, Gary
Based on the facts you have provided, the interest on $100,000 of the mortgage balance will be deductible. If you wish to deduct all the mortgage interest on alll $300,000, the second home will have to secure the mortgage.
I agree with Bill, but I'll take one step further because I ran into this some years back.
You take out a second on your current home (to get a better interest rate) and use the money to buy the second home. Then realizing that you can't deduct the interest on the full $300 you refinance the second home trying to get the full interest deduction. This doesn't work either. Once the mortgage is paid down, refinancing or HELOC'ing more than the remaining balance causes the same issue - an equity loan which may be more than $100K and which may not be fully deductible.
Gene E. Utterback, EA, RFC, ABA
just out of curiousity - why is that $100k a limit ?
The $300k is just a mortgage - and could be used for Vegas, school, art, etc - Unless it's a HELO.... same concept...
Since I don't have any of these - just curious...
ahhh - found this explanation -
Because Congress said so when they wrote the statute.
And same limit - $100k of loan principal.
Thanks. I was hoping I misunderstood the IRS instructions. Because the best rate I've found is 9% where we are buying (Costa Rica) a mortgage on the second home isn't practical. At least we will be carrying it only for a year and a half plus whatever time it takes to sell our current home.
Thanks again, Gary
Would the US bank take a mortgage on your Costa Rican property in addition to the mortgage on your US home? They're not losing anything, and getting a little more security. You might have to talk to a Costa Rican lawyer about setting that up, unless you are dealing with an international bank with branches in CR.
I haven't found a US bank that will mortgage foreign properties. Lenders that specialize in Costa Rica RE have high interest rates. We will continue to look.
Thanks, Gary
If the Gang of Six get their way, starting in 2013, deduction of mortgage interest will be a thing of the past, but supposedly the income tax rate would also be reduced. For those who can afford and qualify for a large mortgage now, the loss of the deduction will probably raise one's tax burden more than the the savings in the lower marginal tax rate, resulting in higher net taxes.
As with many tax policies currently in flux, I would not make any assumptions that you can rely on a deduction for mortgage interest after
2012. If a person is considering buying a second home, they should assume for now that after 2012 they will have zero interest deduction on the primary, secondary, or any home. Still now is a good time to buy while the housing market is weak. If you must rely on the deduction in order to buy the house, I wouldn't until the decision on these tax policy debates has been settled.
Given the recent steep decline in house prices, your premise appears very unlikely. Mortgage interest deduction is one of the sacred cows of the tax code. I don't see that changing too soon.
I imagine they might do away with the deductions for a second home, or to the extent a mortgage is more than $1 million, for example. But I agree with you, it is unlikely they will do away with the basic mortgage interest deduction.
They may limit it in some fashion, for example for your first home, or to an accrued limit of interest deducted. Something is going to change, and complexity added.
In the described scenario, the $300,000 is borrowed against the equity of the first home and used to buy the second home. The interest on only $100,000 of equity indebtedness is deductible. It doesn't have to be a HELOC to be equity indebtedness.
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