For several years now, there has been some confusion as to the amount of deductions that a taxpayer can claim against interests on mortgages.
The confusion was more for individuals who had mortgage balances of more than $1,000,000.
00.
Though most taxpayers will have outstanding mortgages of below $1 million, there are some taxpayers (tens of thousands), especially those living in expensive cities where houses are priced way over $1 million, who have mortgages that are significantly more than the $1 million threshold.
The IRS rules were unclear about the exact cap for mortgage interest deductions.
Some tax preparers, IRS agents and accounting professionals, interpreted the IRS rules to mean that a taxpayer would get tax deductions for interests from mortgage loans up to $1,100,000.
00.
Other tax associates interpreted the law to mean that the IRS allowed for a deduction of interest for mortgage acquisition loans of up to $1 million and a further interest deduction for equity mortgage interest of up to $100,000.
00.
A mortgage acquisition loan is a loan taken to finance a purchase of, constructions to, or substantial improvement mad to a house.
It is usually the initial mortgage that a homeowner takes out with a mortgage financier to purchase or build a home.
The collateral for the loan is the house itself.
On the other hand, a home equity loan is a loan taken against the equity portion on a house.
For example, if a house has a market value of $500,000.
00 and the outstanding mortgage on the house $200,000.
00, then the homeowner has equity of $300,000.
00 on the house and can make a loan against it.
This type of borrowing against equity is referred to as a home equity loan.
However, for the home equity mortgage to qualify for a deduction, the equity loan must be used towards improving the home or purchasing another qualifying house.
The categorization and apportioning of the mortgage interest cap for tax deduction is what posed all the confusion.
However, in June 2010, the IRS addressed this mix-up through clearer guidelines.
According to the rules' clarifications, they stated that home acquisition loans above $1 million also qualified as home equity loans.
This meant that irrespective of how you looked at it, interest on $1,100,000.
00 mortgage was tax deductible.
This shed more light in the handling of mortgage deductions and also meant good news for anyone who had a mortgage that was over $1 million.
However, following the confusion and the uncertainties that befell the mortgagers prior to this clarification, the IRS is now increasing the number of audits to the affected taxpayers.
Many of the taxpayers who have mortgages above $1,000,000.
00 are now being audited and receiving calls from the IRS for clarifications here and there.
For many, the IRS audits pose little challenges as most people only have a single mortgage that is outstanding and the tax deductions on the interest is straight forward.
However, for some of the mortgagers with complex debts with financing models that spill over to two or three homes, a tax audit may result in tax liabilities.
The IRS allows for interest deductions on only two houses but at times, the financing on multiple houses makes it hard to tell what funds of the mortgage are attributed to which specific house.
In such scenarios, the effective tax deductions may not be obvious and the IRS will definitely pay more attention and scrutinize the tax returns that have such claims.
The confusion was more for individuals who had mortgage balances of more than $1,000,000.
00.
Though most taxpayers will have outstanding mortgages of below $1 million, there are some taxpayers (tens of thousands), especially those living in expensive cities where houses are priced way over $1 million, who have mortgages that are significantly more than the $1 million threshold.
The IRS rules were unclear about the exact cap for mortgage interest deductions.
Some tax preparers, IRS agents and accounting professionals, interpreted the IRS rules to mean that a taxpayer would get tax deductions for interests from mortgage loans up to $1,100,000.
00.
Other tax associates interpreted the law to mean that the IRS allowed for a deduction of interest for mortgage acquisition loans of up to $1 million and a further interest deduction for equity mortgage interest of up to $100,000.
00.
A mortgage acquisition loan is a loan taken to finance a purchase of, constructions to, or substantial improvement mad to a house.
It is usually the initial mortgage that a homeowner takes out with a mortgage financier to purchase or build a home.
The collateral for the loan is the house itself.
On the other hand, a home equity loan is a loan taken against the equity portion on a house.
For example, if a house has a market value of $500,000.
00 and the outstanding mortgage on the house $200,000.
00, then the homeowner has equity of $300,000.
00 on the house and can make a loan against it.
This type of borrowing against equity is referred to as a home equity loan.
However, for the home equity mortgage to qualify for a deduction, the equity loan must be used towards improving the home or purchasing another qualifying house.
The categorization and apportioning of the mortgage interest cap for tax deduction is what posed all the confusion.
However, in June 2010, the IRS addressed this mix-up through clearer guidelines.
According to the rules' clarifications, they stated that home acquisition loans above $1 million also qualified as home equity loans.
This meant that irrespective of how you looked at it, interest on $1,100,000.
00 mortgage was tax deductible.
This shed more light in the handling of mortgage deductions and also meant good news for anyone who had a mortgage that was over $1 million.
However, following the confusion and the uncertainties that befell the mortgagers prior to this clarification, the IRS is now increasing the number of audits to the affected taxpayers.
Many of the taxpayers who have mortgages above $1,000,000.
00 are now being audited and receiving calls from the IRS for clarifications here and there.
For many, the IRS audits pose little challenges as most people only have a single mortgage that is outstanding and the tax deductions on the interest is straight forward.
However, for some of the mortgagers with complex debts with financing models that spill over to two or three homes, a tax audit may result in tax liabilities.
The IRS allows for interest deductions on only two houses but at times, the financing on multiple houses makes it hard to tell what funds of the mortgage are attributed to which specific house.
In such scenarios, the effective tax deductions may not be obvious and the IRS will definitely pay more attention and scrutinize the tax returns that have such claims.