How much mortgage interest can be claimed on taxes in the following scenario: Donald and Daisy owned their house in Disrepair (that they lived in all of 2015) for which they paid $18,500 in acquisition mortgage interest (the loan balance all year was $370,000), plus they paid an additional $7,000 in interest on a home equity debt interest on a home equity interest debt with a balance of $140,000 during all of 2015. When the home equity debt was obtained, Donald and Daisy's personal residence was worth $500,000. They used all $140,000 of the loan proceeds to buy a pond for Donald's mother (who did not live with them, nor did Donald or Daisy live there). 

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Tax deductions vary by jurisdiction, but I'm assuming you mean the IRS federal income tax deduction for mortgage interest. The IRS has detailed guidelines on how to handle various living situations, but they can be quite complex and often confusing. The key here is that to be deductible, the interest...

Unlock
This Answer Now

Start your 48-hour free trial to unlock this answer and thousands more. Enjoy eNotes ad-free and cancel anytime.

Start your 48-Hour Free Trial

Tax deductions vary by jurisdiction, but I'm assuming you mean the IRS federal income tax deduction for mortgage interest. The IRS has detailed guidelines on how to handle various living situations, but they can be quite complex and often confusing.

The key here is that to be deductible, the interest must be paid on a loan collateralized by a qualified home; generally, this means one primary home and possibly one secondary home. Only homes you actually live in can be used as qualified homes, so the pond for Donald's mother wouldn't qualify.

Donald and Daisy didn't mortgage the pond, though; they took out a home equity loan on their own residence, which is a qualified home. Therefore, the loan is collateralized by a qualified home, and is therefore tax deductible.

There's another caveat, which is that home equity debt is only deductible up to $100,000 per household, so only the interest paid on $100,000 of that $140,000 is deductible. It's 5% interest, so that's $5,000 deductible and $2,000 not.

There is also a $1 million per household cap on acquisition mortgages, but they're well under that limit.

Thus, the deductible interest is $18,500 for the acquisition mortgage and $5,000 for the home equity mortgage, for a total of $23,500. The remaining $2,000 on the home equity mortgage is above the cap and therefore not deductible.

Approved by eNotes Editorial Team