Mortgage Interest rephrased

[Kram BergGold]

Homeowner buys house for $200,000. Has a $160,000 mortgage paid down to $150,000.
Three years ago the FMV of the house was $205,000 and a $40,000 home equity loan was taken out. The FMV of the house is now $150,000. Is the interest on the home equity loan still deductible?

[Bees Knees]

IRS Pub 936, page 9 under Home Equity Debt Limit says:

Home equity debt limit. There is a limit on the
amount of debt that can be treated as home
equity debt. The total home equity debt on your
main home and second home is limited to the
smaller of:
• $100,000 ($50,000 if MFS), or
• The total of each home’s fair market value
(FMV) reduced (but not below zero) by the
amount of its home acquisition debt and
grandfathered debt. Determine the FMV
and the outstanding home acquisition and
grandfathered debt for each home on the
date that the last debt was secured by the
home.

Note that FMV is determined on the date that the last debt that was secured by the home. The current FMV is irrelevant.

So in your case, FMV was $205,000 at the time the last debt was secured by the home. Home equity debt is the lesser of $100,000 or $205,000 minus acquisition debt at the time. If acquisition debt was $160,000 at the time, then 205,000 minus 160,000 = 45,000. If acquisition debt was $150,000 at the time, then 205,000 minus 150,000 = 55,000.

In your case, since home equity debt was $40,000 at the time the last debt was secured by the home, it is less than $100,000, or $45,000, or $55,000. Thus all of the interest is deductible. The FMV at the current date is irrelevant.

[Kram BergGold]

Thanks Bees

Whew! I am glad that was the answer.