Homeowners with outstanding balances on their mortgages are allowed to deduct the interest from their taxes. However, there are some restrictions on this deduction. They have to do with the nature of the property, the amount of the loan, the number of properties, the fair market value and the purpose of the loan, i.e. in the form of home equity.
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The Nature of the Property
To qualify for a tax deduction, the property must fall under the official description of a home. Surprisingly, these restrictions are quite loose and anything that contains a kitchen, sleeping area and bathing area can be considered a home. This means that the interest accrued to cover a luxury boat or a mobile home, for instance, qualifies.
Amount of the Mortgage
The amount of the mortgage is another restriction that may prohibit a tax deduction. For example, the interest accrued on a loan of £0.6 million may be deducted. The interest generating from any amount above £0.6 million does not qualify.
Number of Properties
You may deduct the interest from a mortgage loan on two qualifying properties. However, the combined amounts of the loans cannot exceed the stipulated limit of £0.6 million. Some people mistakenly think they can purchase two properties with a net value over the stipulated amount for each and still qualify for the deduction. The amount for both homes for which deductions can be claimed must not exceed £0.6 million.
Fair Market Value
If a person has taken out a mortgage of £0.6 million or less but the property is appraised at a lesser value by an official appraiser, the amount of interest of the loan must be determined by the fair market value and not solely by the amount of the loan. Overvaluations tend to occur in booming housing markets where prices are often exaggerated.
Interest accrued from loans that qualify as home equity are also tax deductible if the principal amount is less than £65,000. These are loans that are secured by the value of the home and are typically applied toward home improvement projects to increase the total appreciation.
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