Are you a homeowner and wondering what is a mortgage exemption? This is a type of tax deduction used by homeowners to help lower their annual tax burden. The homeowner uses a formula provided by their government tax agency to calculate the amount of the exemption and then uses this amount when they file their annual tax return. This amount is deducted from the annual income total which can help reduce the amount of taxes the homeowner owes.
There are several countries which have exemptions for mortgage interest, including Switzerland, the United States, and the Netherlands. Ireland, Belgium, and Sweden allow a smaller percentage of the mortgage interest to be deducted. In Canada, homeowners can deduct interest mortgage on residences used for business purposes. This includes rental properties or space rented as offices.
In India, a portion of the home mortgage interest is deductible during the year the property was acquired. The deduction must be taken when the property is completed or the owner takes possession. The Netherlands allows all mortgage interest payments to be deducted for up to 30 years. Of interest, however, is that the amount of taxable income increases based on the property’s potential for generating income. In Sweden, homeowners are allowed to take a 30% deduction for 100,000 SEK and 21% for anything over 100,000 SEK.
In the United States, homeowners are allowed to deduct mortgage interest with several limitations. First, the taxpayer must itemize all of their deductions. These must exceed the standardized deduction. Next, only the interest payments on the principal residence or a second home may be deducted. Also, the mortgage interest can only be deducted up to the first $1M of the loan and the loan must be used to construct, acquire, or substantially improve the residence. The mortgage interest on the first $100K of a home improvement loan may also be deducted.
According to the IRS, a home is considered to be a house, cooperative, townhouse, condominium, boat, recreational vehicle, mobile home or another type property which includes cooking, sleeping and toilet facilities. The primary borrower on the note will take the interest deduction.
If a homeowner is taking a deduction on a second home, they must use this residence for at least 14 days or if they rent it out, for at least ten percent of the rental days at fair market value. A different second home may be used each tax year, providing it meets the qualifications.
If a home is refinanced in the United States, interest may still be deducted, however, any money borrowed in excess of the old debt is treated as a home equity debt and interest up to $100K may be deducted. If points were paid during refinancing, these may also be deducted over the life of the new loan.
It is important to keep accurate records when using the home mortgage tax deduction. These should include the mortgage interest statement, the closing statement, the seller’s information, and the tax return from the previous year. If you want to know what is a mortgage exemption, talk with a tax prepayer or mortgage lender.