In general, you can deduct on your federal income tax all mortgage interest you pay (with certain limits that don't concern most of us.)

Deductible interest includes that paid on:

• first mortgages (or deeds of trust)
• second mortgages
• home equity loans (which are really second mortgages).

All that is necessary is that the loan be secured by the real estate and entered in the public records.

The limits are on borrowing of up to a total of $1 million to buy and/or improve both a first and a second (vacation) home. Interest on an additional $100,000 of borrowing (second mortgage, home equity loan) is also deductible, no matter what the proceeds are used for.

The "points" often paid as extra upfront interest to a lending institution are also deductible. Those paid on a loan for the purchase of a home are deductible by the buyer, who can list them on that year's tax return, them even if they were paid by the seller.

The seller does not get to take payment of points as a deduction; they count merely as one of the costs of selling and reduce any capital gain -- which is probably not taxable anyhow under the new liberal homesellers' tax break.

Points paid for a loan on investment property, or on a refinance mortgage, must be amortized --deducted bit by bit over the life of the loan.

When a mortgage loan is made within the family -- parents helping children to purchase a first home, for example -- the same rules apply. Assuming the loan is indeed secured by the real estate and entered in the public records, the children are entitled to deduct interest actually paid. The parents, of course, will report the interest received as income on their own returns.

Real Times Interest Rate Watch

Published: February 1, 1999

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