Question

In 2020, Niesha purchased her principal residence for $450,000. On January 15, 2023, when she owed $380,000 on the original mortgage, she took out a home equity loan. In January 2023, the fair market value of the home was $490,000. The home equity loan proceeds were used to purchase a new car and pay off credit cards. It was not used to build, buy, or improve her home. During the year, she paid $6,200 in interest on her first mortgage and $1,580 in interest on the home equity loan. What amount of mortgage interest can Niesha deduct on her Schedule A (Form 1040), Itemized Deductions?

Answer 1

To determine how much mortgage interest Niesha can deduct on her Schedule A (Form 1040), we need to consider the rules governing the deductibility of mortgage interest, particularly for home equity loans.

1. Mortgage Interest on First Mortgage: Niesha paid $6,200 in interest on her first mortgage. This interest is generally fully deductible if the mortgage is secured by her principal residence and meets the debt limits.

2. Home Equity Loan Interest: Niesha also paid $1,580 in interest on the home equity loan. However, the deductibility of interest on a home equity loan depends on how the proceeds were used. The Tax Cuts and Jobs Act (TCJA) enacted in 2017 limits the deduction for interest on home equity loans to situations where the funds are used to buy, build, or substantially improve the taxpayer’s home.

In this case, Niesha used the home equity loan proceeds to purchase a car and pay off credit cards, which does NOT qualify as money used to buy, build, or improve her home. Therefore, the interest on the home equity loan is not deductible.

Summary of Deductions:

• Interest on First Mortgage: $6,200 (deductible)
• Interest on Home Equity Loan: $1,580 (not deductible)

Total Deductible Mortgage Interest:

Niesha can deduct $6,200 on her Schedule A (Form 1040) for the interest paid on her first mortgage. The interest paid on the home equity loan is not deductible.

Final Answer: $6,200