What about Taxes and Your Second Mortgage?

For the average consumer who has managed to acquire creditcard debt, automobile loans, and various other small debts, is the secondmortgage loan an answer for the consolidation of debt and a tax reduction? Quite often the answer to this question isyes. Second mortgages that havetraditionally been used in areas of home improvement, funding collegeeducations or business startups are now being considered as a means to eliminateor consolidate high-interest credit card debt and create a tax deduction at thesame time.

For the average consumer, using second mortgage loan money to pay off credit card debtor to consolidate individual personal loans does not eliminate the possibilityof a tax reduction; especially if that average consumer does not already own asecond home. The only problem here seemsto be that we're replacing credit card debt for second mortgage debt; what dowe then do with the credit card we've paid off? The smart consumer cuts themup.

How does asecond mortgage affect your tax liability at the end of the year? A lot of that will depend on your incomelevels, your medical expense, and your other interest deductions. Mortgage interest expense is deductible onthe Schedule A “Itemized Deductions” form of your individual or personal taxreturn. The Schedule A, however is not astraight tax reduction tool. Taxreductions, or deductions, carried forward from the Schedule A are a percentageof your AGI, or your adjustedgross income. Your adjusted gross incomeis based upon your income less certain expenses and deductions from ScheduleCs, Schedule Es etc. etc. Can you now see where this might be a littlecomplicated?

Let's throw something else into the mix: if you're an investor, especially in the realestate market, your mortgage interest may not be deductible, period. Mortgage interest on your first home and onyour second home is a tax-deductible interest; if however, you happen to be aninvestor in the real estate market the ability to make it clear distinctionbetween first and second homes versus investment property becomes much harderto prove. Is the home a second home withdeductible mortgage interest expense, or is it an investment? Of course, for investors interest expense ona loan for investment purposes is fully tax deductible; no percentages to workwith at all.

Now let'sask 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 betterbenefit when it comes tax time versus leading the money in your home asequity? This has been a question longdebated by financial analysts, tax attorneys, and fairly tax proficienthomeowners. How does the equity betterserve the homeowner? As a savings account,which is really what the equity in your home turns out be, or as an investmenttool that can be used to increase your retirement savings? There are other factors to be consideredhere: such as penalties for early withdrawal, risk ratio versus profitabilityratios, and which programs reduce tax on a one-to-one ratio? Unless you already have some generalknowledge of the tax system, it can be more expensive to determine tax savingsthan you would actually save.

As you cansee there are many, many ways to affect your tax liability, your tax deductions, or affect a tax reduction; the correct answers are highly dependentupon the individual situation and the individual objectives. The only way to accurately determine thebetter 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 lookpast next month. Over the course of astressful and busy work week retirement planning, tax deductions, and incomeproducing benefits never cross the consumer's mind. For those individuals who truly anticipateand receive benefit from tax planning in relation to their mortgage interest,there are many more individuals who never even contemplate that there might bea savings. Maybe, we should just skipthis question.