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If you own a home and are itemizing your tax deductions on Schedule A, you’re probably deducting your mortgage interest (referred to as the mortgage interest deduction).
But did you know that you’re only allowed to deduct “acquisition interest?” Let me explain. The tax code only allows us to deduct mortgage interest incident to a purchase (called acquisition interest). The point is that if a homeowner refinances and takes out equity, the additional interest cannot be deducted.
For example, the initial mortgage of $100,000.00 is subsequently paid down to $90,000.00 and refinanced to $100,000.00. Only $90,000.00 of mortgage interest may be deducted on Schedule A (the remaining portion of the acquisition interest).
Our tax code is constantly being revised so you should always check with your accountant to ensure you’re complying with the current rules.
