Monday, January 14, 2013

Personal Residence Deduction Requirements 163

Qualified Residence Income- Section 163- Itemized Deduction - Taxpayers are allowed to deduct most interest on mortgages that are secured by their personal residence. Very important politically because many people do it.

Personal Residence Deduction Requirements: § 163(h)(3)

FIRST, the number of personal residence is limited to two. § 163(h)(4)(A)(ii). Second home only qualifies if it used 15 days a year. Married couples may deduct one each.

SECOND, the home in question must secure the mortgage loan whose interest obligation the taxpayer seeks to deduct.

THIRD, the mortgage loan must be either “acquisition indebtedness” or “home equity indebtedness." Acquisition Debt is essentially a purchase-money mortgage, used either to buy or build the residence. 1,000,000 or 500,000. Home Equity Debt is any debt secured by a residence that is not acquisition indebtedness. $100,000 Cap. Equity=  FMV-Outstanding Mortgage

A taxpayer who has sufficient equity in the residence may borrow against that equity, use the proceeds for any purpose whatever, and still deduct the interest on the debt.

There is criticism about the vertical equity problem. The rich get more subsidy than the poor in this manner. Lots of people take this exemption. Maybe the Federal Government is losing too much REVENUE on the program.  Economic distortion problem. From the political perspective, lots of people bought their homes calculating their purchases with the interest deduction. All these rules apply to mobile homes.

Finally, the loan amounts generating deductible interest (but not directly the interest itself) are limited by dollar-level maximums: Interest with respect up to $1 millions of acquisition indebtedness can be deducted, as can interest with respect for up to $100,000 of home equity debt. These numbers have not been adjusted recently.

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