Can mortgage interest be claimed back on your taxes? (Chicago: real estate, for rent)

[M4rT1N]

Hi, I’ll be moving back to Chicago in the near future and have a few questions about what can be claimed back on taxes as a property owner. I haven’t decided exactly what neighborhood I’ll be moving to, but it’ll probably be near north side as I’ll be working downtown and hate commuting for anything over 45 minutes. Obviously there are other things that I’ll be looking for, regarding a place to live, but a short commute to work is high on the list for me.

Anyway, my main question is, can interest paid on a mortgage be claimed back on your taxes each year… and if so how much can be claimed back? Is it a specific number, for example 20% of the total interest that you have paid towards your mortgage for the year?

Is there anything else that can be claimed back, in addition to claiming on the mortgage interest?

What happens if you buy a second property, for the purpose of renting it out, can you claim tax back yearly, on the interest paid on this second property (in addition to the tax that you are already claiming back from the first property)?


If so, can you claim back as much? I haven't been able to find much info. on this subject on the web. Last question.... is it accurate to say, that for most areas downtown, near north side, at the moment, annual property tax works out at 1-1.5% of the total value of your property?

Thanks in advance!

[oakparkdude]

I am not a tax accountant (IANATA) but I know that 100% of mortgage interest can be deducted on your federal tax forms. I think this applies to 1st and 2nd homes equally. If you purchase a property for rental, you can't take the interest deduction, but you can depreciate it. Best to consult with a tax pro, though.

[desibear]

I'm not a tax professional but I believe the amount you save on your mortgage interest is based on your marginal tax rate. If your marginal rate (the rate that you are taxed on the very last dollar you earned in 2007) is 28% and your mortgage interest was $10,000, then you basically saved yourself $2,800 in taxes. Someone else chime in if you think that is a flawed understanding please.

For new construction (<3 years old, say), the taxes are more like 1.75%. For anything older than that, probably 1.5%. I don't think you will find 1% in the North side anywhere unless its some 75 year old granny living there that qualifies for all kinds of allowances, in which case as soon as you buy, most likley it will go up.

[oakparkdude]

Again, IANATA, but the mortgage interest deduction, like any itemized deduction reduces the amount of income subject to your marginal rate. Don't forget, when choosing deductions, you can itemize or take the standard deduction (about 10K). So unless your total itemized deductions are greater than the standard deduction, you don't get any benefit. For homeowners you can itemize your mortgage interest, property tax, and state taxes.

If you're in the upper income brackets (and even if you're not), you may have to deal with the alternative minimum tax which is whole different pain in the rear. Again, you really should consult with a tax professional.

[Thepreacherswife]

Well I AM a tax accountant, and there is some good information and some bad information passed on by the previous respondents. So to set the record a bit straighter (generally speaking):

- Yes, you can claim a deduction for mortgage interest paid each year. The bank will send you a tax form (1098) each year telling you how much interest you paid in the previous year. Pretty much any loan you get these days is amortized, so interest makes up the majority of your monthly payment for the first 10-15 years of the loan. Over time, the amount of interest you pay decreases.

- If the loan is for your residence, you claim the interest as an itemized deduction (assuming you have enough itemized deductions to make it worth your while). Same goes for real estate taxes paid.

- If the loan is for investment property, you claim the interest as a deduction on Schedule E (along with other expenses of operating the investment property, such as taxes, depreciation, maintenance, etc).

- A deduction is not a dollar-for-dollar reduction in your income taxes (those are called tax credits). A deduction simply reduces the amount of your income subject to tax. The U.S. has a graduated tax rate system, so the higher your income, the higher the tax rate.

- more info (great bedtime reading) :
http://www.irs.gov/pub/irs-pdf/p530.pdf (tax info for first-time homeowners)
http://www.irs.gov/pub/irs-pdf/p936.pdf (home mortgage interest deduction)
http://www.irs.gov/pub/irs-pdf/p17.pdf (your federal income tax)

- go see a tax professional

[87vertgt]

Originally Posted by Thepreacherswife

Well I AM a tax accountant, and there is some good information and some bad information passed on by the previous respondents. So to set the record a bit straighter (generally speaking):

- Yes, you can claim a deduction for mortgage interest paid each year. The bank will send you a tax form (1098) each year telling you how much interest you paid in the previous year. Pretty much any loan you get these days is amortized, so interest makes up the majority of your monthly payment for the first 10-15 years of the loan. Over time, the amount of interest you pay decreases.

- If the loan is for your residence, you claim the interest as an itemized deduction (assuming you have enough itemized deductions to make it worth your while). Same goes for real estate taxes paid.

- If the loan is for investment property, you claim the interest as a deduction on Schedule E (along with other expenses of operating the investment property, such as taxes, depreciation, maintenance, etc).

- A deduction is not a dollar-for-dollar reduction in your income taxes (those are called tax credits). A deduction simply reduces the amount of your income subject to tax. The U.S. has a graduated tax rate system, so the higher your income, the higher the tax rate.

- more info (great bedtime reading) :
http://www.irs.gov/pub/irs-pdf/p530.pdf (tax info for first-time homeowners)
http://www.irs.gov/pub/irs-pdf/p936.pdf (home mortgage interest deduction)
http://www.irs.gov/pub/irs-pdf/p17.pdf (your federal income tax)

- go see a tax professional

Real good stuff...

Is it true you can only write off %75 percent of the paid interest?

[M4rT1N]

Thanks for your posts everyone, very informative. Your time’s much appreciated! I’ve downloaded the 3 IRS forms and am having a read through them. By the way, if you want to see how much interest you’re paying on a mortgage, at any point in time, during the duration of the loan, I’ve found this online mortgage calculator to be very useful……

Karl's Mortgage Calculator

When you punch in the numbers and see the interest that you’re paying at the beginning of your mortgage, it’s pretty surprising stuff…… nearly 65% is pure interest!