You can deduct the interest portion of your mortgage payments whether the loan is for residential or business purposes. There are limits for home mortgage interest, however. Currently, only the interest on US Dollars 1,000,000 worth of home mortgage debt is deductible. Fortunately, most of us do not need to worry about this problem.
Home equity line of credit interest is deductible on only US Dollars 100,000 worth of debt. You can have more debt than that, but you can only deduct the interest on the first US Dollars 100,000 portion. Second home interest is also deductible. However, your combined mortgage debt is limited to that US Dollars 1,000,000 ceiling.
You can read more information on deducting mortgage payments in IRS Publication 936, "Home Mortgage Interest Deduction." For more information on the mechanics and details of homeownership deductions in general, refer to IRS Publication 530, "Tax Information For First-Time Homeowners." You can download these from here.
Your tax savings will depend on how much interest you are going to pay and what tax bracket you are in. Tax brackets change each year. They are based on your filing status (married, single, etc.) and your adjusted gross income level. The brackets are prorated, so even if you are in a higher tax bracket, part of your income is still taxed at the lower percentage.
For homeowners, I generally do not recommend counting on income tax savings to help support a higher monthly mortgage payment than originally planned. This is because there are usually many unexpected expenses with homeownership, so your tax savings need to be reserved for those items.
Flippers usually do not hold property long enough to generate any tax advantages. Investors who buy for the long term may enjoy significant tax savings through interest deductions, ownership expenses, and depreciation deductions. The combination of all three may make seemingly expensive properties much more affordable.
The IRS has an excellent tax calculator. The information you enter into the calculator is completey confidential. You do not enter your name, and the IRS cannot tell who you are. All information is deleted as soon as you exit.
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Note: This article was sent to us by: Nathaniel D. Wadross at 06262010
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