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Q: Can I deduct the mortgage interest if I refinance and increase my loan balance?

A:  Only interest on the remaining acquisition indebtedness balance is deductible unless the increase in loan balance is used to substantially improve the property. Acquisition indebtedness is a loan used to acquire, build, or improve your home.

For example: Suppose you have a remaining $400k balance left on your mortgage. You refinance and borrow a total of $500,000.  The interest on the original $400k is deductible.  However, the interest on the additional $100k would not be deductible unless the additional funds are themselves used to substantially improve the residence.

Q: Can I deduct the mortgage interest on a Home Equity Line of Credit (HELOC)?

A:  Possibly.  HELOC debt used to pay personal expenses (e.g. credit cards, cars, vacations) is no longer deductible (after 2017). However, HELOC interest on up to $100k of HELOC debt may be deductible if the loan was used to buy, build or substantially improve the home that secures the loan (primary residence or 2nd home).

Q: Can I deduct the mortgage interest on a rental property?

A:  Yes. This works a bit differently than the home mortgage interest deduction, which is an itemized deduction subject to its own limitations and phase-outs. The interest deduction on a rental property is not limited to $750k in mortgage debt, but rather is an expense deductible against rental income. Losses on rental properties (when expenses exceed rental revenue) are only deductible up to a limit (see passive activity rules) and disallowed losses may be carried forward.

Q: Can I deduct the mortgage interest on a vacation home?

A: Yes! You can deduct the interest on your primary residence and one additional home provided that the total acquisition indebtedness does not exceed the thresholds ($750k for properties purchased after 12/15/2017). You would only be able to deduct a portion of your mortgage debt if you exceeded the deductible threshold. For example.  If you bought a home (or primary and 2nd home) in 2018 or later and had total acquisition indebtedness of $1.25 million, you could only deduct 60% of the mortgage interest ($750,000 / $1.250,000 = 60%).

Q: Can you deduct mortgage interest on an RV or houseboat?

A:  Yes. A home is anything that has sleeping accommodations, a toilet, and cooking facilities. This would include mobile homes and even some types of boats. If that isn’t reason enough to buy a houseboat, I don’t know what is.

Q: Is mortgage interest deductible if I rent my home less than 15 days a year?

A:  Yes.  The mortgage interest is deductible and you don’t even have to claim the rental income! A home rented for fewer than 15 days is classified as a personal use asset (as opposed to a rental property). The qualified mortgage interest and property taxes will be reported as an itemized deduction on Schedule A of your tax return.

On the other hand, if your home is rented for more than 15 days, you must report all your rental income and can deduct your rental expenses. However, you must divide your expenses between the rental use and the personal use. I will leave it up to your CPA or the IRS to “enlighten” you with those details.

Q: Are all charitable contributions deductible?

A: Charitable contributions to a qualified charity are only deductible if you itemize (as opposed to taking the standard deduction). Fewer taxpayers are itemizing with the higher standard deduction that resulted from the Tax Cuts and Jobs Act, however you can still get the equivalent of a deduction if you are over 70 1/2 years old and have your IRA custodian send the funds directly from your IRA to the charity.  Typical charitable contributions (not from an IRA) are deductible (assuming you itemize) up to 60% of your (AGI) adjusted gross income if you donate to a public charity, but limited to only 30% of AGI when donating to a private foundation. Disallowed deductions can be carried forward and used over the following five years. In terms of noncash donations, you can generally only deduct what you paid for the item (the cost basis) unless the item is used by the organization for the charity’s chartered purpose. Read: ’Tis the Season for Charitable Giving.

Q: Are gifts taxable?

A: Gifts are never taxable to the recipient, but they could be taxable to the gift giver. The current annual gift tax exclusion limit is $16,000 (as of 2022). You can give away up to this amount to as many people as you would like each year without any taxes or reporting requirements.

Each person also has a lifetime federal estate tax exclusion, which is $12.06 million (as of 2022). You can give more than the $16,000 to any person, any time, if you elect to use up a portion of your lifetime exclusion. To do this, you need to file tax form 709 to let the IRS know. There are some other considerations and exemptions, so for more detail, read: Gifting and Taxes.

Q: How are capital gains taxed?

A: Capital gains taxes do not apply to investments held in IRAs, 401ks, or other qualified retirement plans. Gains on investments that are sold in non-retirement accounts (e.g., individual accounts, joint tenant, community property, and trust accounts) are taxable. Gains are taxed at the same rate as ordinary income if the investment was held for a year or less. Capital gains on investments held more than a year are always taxed at a lower rate than the rate you pay on ordinary income.

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