Assume a home, in the United States, has a value of $500,000.00.  
What would be the maximum amount of money that could be borrowed on
the home and still be tax deductible?  The funds would be for personal
use, and not for any business use.

Hi Clicker,

You want to know how much of the interest on a mortgage of
a $500,000 home would be tax deductible, right?

Here's what IRS has to say on this matter in Publication 596
Home Mortgage Interest Deduction:
http://www.irs.gov/formspubs/page/0,,id%3D12832,00.html

Home acquisition debt limit. The total amount you can treat as home 
acquisition debt at any time on your main home and second home cannot
be more than $1 million ($500,000 if married filing separately). This
limit is reduced (but not below zero) by the amount of your 
grandfathered debt (discussed later). Debt over this limit may qualify
as home equity debt (also discussed later). 

So, when you buy the home - you can borrow 100% and still have it 
fully tax deductible.


If you are refinancing? That's different. 

You may borrow, in simple English, as much as your existing loan, 
plus another $100,000.

On the other hand, if you are using the money to make improvements,
rebuild, or add to the house, you may borrow your existing loan amount, 
the cost of the improvements plus $100,000 and still be able to deduct
the interest.

IRS has a pretty good worksheet over here, as part of the Pub 596
http://www.irs.gov/forms_pubs/graphics/10426g04.gif

Please feel free to let me know if this is confusing.

Your TaxMama-ga

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Request for Answer Clarification by clicker5-ga on 22 Nov 2002 23:26 PST

Hello Taxmama:

Just to make this clear in my mind:

If a home has no existing mortgage, then $100,000.00 can be borrowed
on the home, and the $100,000.00 would be tax deductible.

Clicker5

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Clarification of Answer by taxmama-ga on 23 Nov 2002 01:00 PST

Hi Clicker,

Uh, not exactly.

If you are buying the house, yes, you can deduct 
interest on a $500,000 loan.

If you already own the house - no.

You can get a mortgage for the following value and
deduct all the interest. (add up each of these items):

1) The purchase cost 
(or if gifted, the cost to the person who gave it to you)
(or, if inherited, the fair market value at date of death)

2) Costs of improvements, things that are added to the property
(things like adding a garage, roof, driveway, carpeting,
pool, landscaping, new rooms, re-zoning, etc.)

3) Remodeling costs (especially if you will be using part of
the loan for that)

4)$100,000

5) Deduct any casualty losses that were ever taken on your
tax return with respect to this house.


If this isn't clear, tell me something more about the property, ok?

a) Do you own it now? 

b) Did you buy it? When, for how much?

c) If not, did you inherit it? Or was it a gift?

d) if so, did they give you the value you will need
to use as your cost (or 'basis')?

e) Did you add anything to the property? 
(See improvements, above)

f) Was it ever damaged in a big way?
(Fire, flood, earthquake, car driving into it)

g) What will you do with the money?

I can help you a little more with the additional information.

Best wishes,

Your TaxMama-ga

Thank you :
clicker5-ga