Why Congress Might Have to Mess with the 401(k)

I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?

Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment and the interest you paid on the second mortgage would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions. For more information, see IRS Publication 550: Investment Income and Expenses (PDF 554kb) and IRS Publication 936: Home Mortgage Interest Deduction (PDF 139kb).

IRS Publication 936 - Main Content

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

Main home. You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

http://www.irs.gov/publications/p936/ar ... 1000229900

That's interesting. I never knew second homes qualified.

I'm all for eliminating the second home deduction, and the investment expense deduction. If you're borrowing in order to invest, it should be considered a cost of doing business, not as a tax deduction.

Canada doesn't has the mortgage deduction and studies say it doesn't seem to hurt their housing industy.

It doesn't seem affect their ability to provide health-care to all of their citizens, either...

I believe you can deduct mortgage interest on any mortgage.....even on a home that isn't yours if you are the one paying the mortgage....the owner of the home can assign the deduction to you if you have proof that you are the one actually making the mortgage payments. Some people do this if they are paying the mortgage on an elderly parents home. I don't think you can take the mortgage deduction on a rental property....that would become an expense against income from the property. It's been a while since I have read the tax code, so that may have changed, but I don't think so.

Edited.....oops, scooped again by LJ

Should have nixed the home equity loan and 2nd home deduction along time ago, its stupid. Bernanke's interest rate cut deduction is far more valuable right now than any mortgage tax deduction anyway. With almost a $6K standard deduction or 2x that for couples, most aren't going to see much benefit itemizing house expenses anyway for homes around $200K with 3% interest rates.

Wow, who knew that Time Magazine would join the anti-administration outrage of the day crowd.

Nobody that matters wrote: That's interesting. I never knew second homes qualified.

I'm all for eliminating the second home deduction, and the investment expense deduction. If you're borrowing in order to invest, it should be considered a cost of doing business, not as a tax deduction.

OH MY GOODNESS, I cannot believe you said that.

The costs of doing business are CALLED DEDUCTIONS.

If a store has total sales of $100,000 and the cost of all the items from the wholesaler was $90,000, the $90k is listed in the taxes as a deduction, not a cost. Pretty much everything that is not net profit is a deduction.

The cost of doing business is a real thing. A deduction is a fictional number calculated using a tax formula. Some costs of doing business are deductions, but not all. Some deductions exceed the cost of doing business, but it is rare (think when you get milage for your car but you have a cheap car and come out ahead).

Now my understanding is that after 2 years, you can no longer simply claim a loss, or a net deduction larger than your income for a business. This is different, but would limit you from deducting the cost of doing business forever in order to cheat your taxes. There may be a loophole for this on 2nd property (in fact I think there is). The questions are is it an investment.

Then you also need regulations to make sure that 2nd mortgages on houses and other creating primary house financing goes towards that house OR you have found another loophole.

It will never end if the tax system is longer than 1 page.

In general the mortgage interest deduction makes the system more regressive. With no deduction for homeowners, landlords would get the deduction as IT IS A BUSINESS EXPENSE and the poor folks in rentals would continue to not have this cost passed onto them, but people that OWN homes (not really, the banks own them or there is no interest) would pay more.

Likely to just be limited with a MAX?