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Itemized deduction 3
Interest Paid
| Question | Answer |
|---|---|
| For income tax purposes we divide interest into several catagories. What are they | Business interest, investment interest,personal ionterest, qualified home mortgage interest,and passive activity interest. |
| Why is it important to distinguish qualified home mortgage interest from personal interest | Qualified home mortgage interest is deductible but personal interest is not |
| On how many personal homes may a taxpayer deduct home mortgage interest | Two |
| There are two categories of home mortgage interest. What are they | Acquisition debt and home equity debt |
| What is acquisition debt | Debt secured by the home,incurred to buy,build,or improve the home |
| What is home equity debt | Debt secured by the home and used for a purpose other than to buy,build,or improve the home |
| Generally what is the limit on acquisition debt for which interest paid may be deducted in full | $1million($500,00 MFS) |
| What is the comparable limit for home equity debt | $100,000($50,000 MFS) or the difference between the FMV of the home and the total remaining acquisition debt whichever is less |
| What are points | A one-time interest charge paid up front for the use of money.Points are also called loan origination fees,maximum loan charges and loan discounts |
| When are points deductible | Generally they are deductible over the life of the loan.However points paid for the purchase or improvement of a home may be deducted in the year paid if certain conditions are met. |
| If paid by the buyer are points deductible | Yes if they're for the purchase of improvement of the taxpayer's principal residence and if the charging of points is a common practice in their area |
| Suppose the points are paid by the seller.What happens then | The points are deductible by the buyer and the buyer must reduce the basis of the home by the same amount. |
| Under what circumstances may points be deducted ratably over the life of the loan(as opposed to using the OID rules) | If the loan is secured by a home lasts not more 30 years and a) is no more than $250,000 or b) not more than four points where paid for loans of 15 years or less(not more than six points were paid for loans or more than 15 years) |
| What is investment interest | Interest on loans used to purchase investmnet property |
| To what extent is investment interest deductible | Investment interest is deductible to the extent of net investment income. Any amount disqualified under this rule may be carried over to future years |
| Is interest paid to purchase nontaxable investments such as municipal bonds deductible | No |
| What is personal interest | Interest on credit cards,car loans, and other loans used for personal purposes.Home mortgage interest in excess of the limits also considered personal interest. |
| Is personal interest deductible | Generally no except for qualified student loan interest |
Created by:
dawn2000
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