What about Taxes and Your Second Mortgage?

For the average consumer who has managed to acquire credit card

debt, automobile loans, and various other small debts, is the

second mortgage loan an answer for the consolidation of debt and

a tax reduction? Quite often the answer to this question is yes.

Second mortgages that have traditionally been used in areas of

home improvement, funding college educations or business

startups are now being considered as a means to eliminate or

consolidate high-interest credit card debt and create a tax

deduction at the same time.



For the average consumer, using second mortgage loan money to

pay off credit card debt or to consolidate individual personal

loans does not eliminate the possibility of a tax reduction;

especially if that average consumer does not already own a

second home. The only problem here seems to be that we're

replacing credit card debt for second mortgage debt; what do we

then do with the credit card we've paid off? The smart consumer

cuts them up.



How does a second mortgage affect your tax liability at the end

of the year? A lot of that will depend on your income levels,

your medical expense, and your other interest deductions.



Mortgage interest expense is deductible on the Schedule A

"Itemized Deductions" form of your individual or personal tax

return. The Schedule A, however is not a straight tax reduction

tool. Tax reductions, or deductions, carried forward from the

Schedule A are a percentage of your AGI, or your adjusted gross

income. Your adjusted gross income is based upon your income

less certain expenses and deductions from Schedule Cs, Schedule

Es etc. etc. Can you now see where this might be a little

complicated?



Let's throw something else into the mix: if you're an investor,

especially in the real estate market, your mortgage interest may

not be deductible, period.



Mortgage interest on your first home

and on your second home is a tax-deductible interest; if

however, you happen to be an investor in the real estate market

the ability to make it clear distinction between first and

second homes versus investment property becomes much harder to

prove. Is the home a second home with deductible mortgage

interest expense, or is it an investment? Of course, for

investors interest expense on a loan for investment purposes is

fully tax deductible; no percentages to work with at all.



Now let's ask another question, if you decide to take out a

second mortgage could you better invest your money? What a

401(k), an IRA, or an MSA be a better benefit when it comes tax

time versus leading the money in your home as equity? This has

been a question long debated by financial analysts, tax

attorneys, and fairly tax proficient homeowners. How does the

equity better serve the homeowner? As a savings account, which

is really what the equity in your home turns out be, or as an

investment tool that can be used to increase your retirement

savings? There are other factors to be considered here: such as

penalties for early withdrawal, risk ratio versus profitability

ratios, and which programs reduce tax on a one-to-one ratio?

Unless you already have some general knowledge of the tax

system, it can be more expensive to determine tax savings than

you would actually save.



As you can see there are many, many ways to affect your tax

liability, your tax deductions, or affect a tax reduction; the

correct answers are highly dependent upon the individual

situation and the individual objectives. The only way to

accurately determine the better benefit is to sit down with a

financial advisor, your tax information, and evaluate your

long-term objectives.



Does the average consumer ever take the time to accomplish this?

As a general rule the answer is no. Most consumers never take

the time to look past next month.



Over the course of a stressful

and busy work week retirement planning, tax deductions, and

income producing benefits never cross the consumer's mind. For

those individuals who truly anticipate and receive benefit from

tax planning in relation to their mortgage interest, there are

many more individuals who never even contemplate that there

might be a savings. Maybe, we should just skip this question.