A Word Homeowners Need to Understand
July 9, 2018 | Tom Ashworth
All About Acquisition Debt
Acquisition Debt is the amount of money borrowed used to buy, build or improve a principal residence or second home. Under the new tax law, mortgages taken after 12/14/17 are limited to a combination of $750,000 on the first and second homes. The mortgage interest on this debt is tax deductible when itemizing deductions.
Acquisition Debt dynamic number reduced with each payment due to balances going down. The only way to increase acquisition debt is to borrow money to make capital improvements.
Prior to the new law, homeowners could additionally borrow up to $100,000 of home equity debt for any purpose and deduct the interest when itemizing deductions. Mortgage interest on home equity debt is no longer deductible unless it is for capital improvements.
Acquisition debt cannot grow by refinancing. The confussion starts with Mortgage Lenders. Mortgage lenders make home loans repaid according to the terms of the note. They use the home as collateral. That does not include making a tax-deductible mortgage.
Another thing adding confusion is lenders annually report how much interest was paid in a year. Only the amount that is attributable to acquisition debt is deductible.
Even if the interest on the cash-out refinance is not deductible, you still have options. It may be advantageous to pay off higher interest debt such as credit card debt. Then replace it with lower mortgage debt.
It is the responsibility of the taxpayer to know what part of their mortgage debt is deductible. The challenge becomes more difficult after a cash-out refinance. Homeowners should keep records of all financing and capital improvements and consult with their tax professional.
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