What is your mortgage balance? Well, that is one answer, but the new tax law has a very specific reference for the term Acquisition Debt as it relates to Denver home owners, and others around the country. So read on to learn more, then talk to you tax adviser as to the effects this will have on re-financing your current Denver mortgage, or buying a new home here, in Littleton or in another part of the country.
Acquisition Debt is the amount of money borrowed used to buy, build or improve a principal residence or second home. Under the new tax law, mortgages taken after 12/14/17 are limited to a combination of $750,000 on the first and second homes. The mortgage interest on this debt is tax deductible when itemizing deductions.
It is a dynamic number that is reduced with each payment as the unpaid balance goes down. The only way to increase acquisition debt is to borrow money to make capital improvements.
Prior to the new law, homeowners could additionally borrow up to $100,000 of home equity debt for any purpose and deduct the interest when itemizing deductions. Mortgage interest on home equity debt is no longer deductible unless it is for capital improvements.
Acquisition debt cannot be increased by refinancing. Some confusion occurs because mortgage lenders are concerned in making home loans that will be repaid according to the terms of the note and using the home as collateral. That does not include making a tax-deductible mortgage.
Another thing that adds confusion to the issue is that the lenders will annually report how much interest was paid in a year but only the amount that is attributable to acquisition debt is deductible.
Even if the interest on the cash-out refinance is not deductible, it may be advantageous to pay off higher interest debt such as credit card debt and replacing it with lower mortgage debt.
It is the responsibility of the taxpayer to know what part of their mortgage debt is deductible. The challenge becomes more difficult after a cash-out refinance. Homeowners should keep records of all financing and capital improvements and consult with their tax professional.
The key here is to consult with your Denver tax adviser BEFORE a re-finance to find out the effects on your tax return. Most good loan officers will be able to answer the question, but a tax adviser is best. To find either a tax adviser or a loan officer go to https://www.denverrelocation.com/vendors.shtml.