Tax Tip: How to Avoid Paying Mortgage Interest

Editor’s Note: This article is part of our 2012 Tax Tips series. Robert Flach is an expert with almost 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.

NEW YORK (MainStreet) -- I recently explained that you can deduct interest on up to $100,000 of home equity debt ($50,000 if married filing separately). But if your home equity borrowing exceeds $100,000 you may still be able to claim a deduction for some of the excess interest.

You can elect to treat a portion of home equity debt that is secured by your residence, and not used to substantially improve the home, as another kind of debt based on what you did with the money you borrowed.

If you use home equity debt to purchase stocks, bonds, mutual fund shares or investment property you can treat the corresponding interest as investment interest, subject to the special limitations for deducting investment interest.

If you use a home equity line of credit to purchase assets, supplies or services for your sole-proprietorship or for a rental property, or to pay for repairs to business or rental property, you can deduct the appropriate interest on Schedule C or Schedule E.

The election is permanent and cannot be revoked or modified in future tax years without the permission of the Internal Revenue Service.

If your acquisition debt exceeds $1 million you can choose to use some of the $100,000 of allowable home equity debt to cover the excess.  If you purchase a home for $1,060,000 you can deduct the interest on the acquisition mortgage in full.  However, you may only deduct interest on up to $40,000 of home equity borrowing.