The tax law permits generous deductions for mortgage interest paid in connection with “acquisition debt” and “home equity debt” of a qualified residence. Now a new ruling from the IRS says that you can combine these two breaks on an initial mortgage (IRS Chief Counsel Advice 200940030).

Under the tax law, “acquisition debt” is any debt incurred to acquire, construct or substantially improve a qualified residence. The residence may be the principal residence or one other home like a vacation home. But qualified acquisition debt can’t exceed $1 million ($500,000 for married taxpayers filing separately).

On the other hand, “home equity debt” is debt secured by the residence that is not acquisition debt, up to a limit of $100,000 ($50,000 for married taxpayers filing separately). Home equity debt can’t exceed the difference between the property’s fair market value and the amount of the acquisition debt. Unlike acquisition debt, home equity debt may be used for any purpose.

Generally, home equity debt is incurred after the original mortgage has been arranged. For instance, you may take out a home equity debt a few years after buying a home to pay for college, medical expenses or emergencies.

In the new ruling, a taxpayer purchased a principal residence for $1.5 million, paying $200,000 in cash and borrowing $1.3 million through a loan secured by the residence. After carefully examining the law, the IRS characterized an extra $100,000 above the $1 million threshold as home equity debt rather than acquisition debt. Therefore, the taxpayer can effectively deduct interest paid on up to $1.1 million of the initial mortgage debt.

Although this is an extreme example, there may be other tax-saving opportunities you are not aware of. Call our office to arrange a personal consultation. We may be able to find tax savings that have been overlooked.


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