What You Should Know About the Mortgage Interest Deduction

Last Updated on May 23, 2021 by Alexis Gallati

If you’re looking for a worthwhile tax deduction, your mortgage is one place you may be able to save money. The mortgage interest deduction is one of the most sought-after in the US. It’s a useful tool for homeowners and realtors. It’s also often touted as one of the best tax deductions you can claim.

For now, let’s ignore any of the hype you may have heard and just go over what the mortgage interest deduction is, how it works, what you can deduct, and whether you qualify for it in the first place.

What Is The Mortgage Interest Deduction?

The mortgage interest deduction is, as the name suggests, a tax deduction you may be able to claim on your mortgage interest. It can be taken on a mortgage or with loans for building or improving a property. 

You can claim the deduction on various property types:

  • Your principal residence
  • Vacation homes
  • Second homes

The tax deduction is meant to serve as an incentive for homeowners.

How The Mortgage Interest Deduction Works

You can claim the mortgage interest deduction based on your lender’s report. Every year, mortgage companies report their borrowers’ deductible interest through IRS Form 1098. 

You can report your mortgage interest payments on Schedule A or Form 8829 for your office in home deduction of your Form 1040. You can also report rental property mortgage interest on your Form 1040, but under Schedule E.

The most common itemized deduction on Schedule A is for home mortgage interest paid, and it’s often the only itemized deduction that allows taxpayers to itemize.

First position mortgages aren’t the only loans that qualify for this deduction. Interest from home equity loans also creates home mortgage interest, which can often be deducted.

Do I Qualify For The Mortgage Interest Deduction?

Your circumstances will determine how much of your mortgage interest is deductible. Your deduction can reduce your taxable income by the amount of money you’ve paid towards mortgage interest during the tax year.

How Much Interest You Can Deduct

In many cases, homeowners may deduct all the mortgage interest they’ve paid. But you need to meet all the requirements to be able to do so. 

If you bought your house before December 15, 2017, the total debt deducted cannot exceed the interest on the first $1,000,000 of your mortgage for a couple filing jointly in one tax year. If you’re filing separately, the mortgage deductibility limit is $500,000.

If you bought your house after December 15, 2017, you can deduct the interest paid on the first $750,000 of your mortgage as a joint filer and single filer (married filed separately is limited to $375,000). 

What Qualifies?

This is where it all gets a bit tricky. The interest you deduct must meet the requirements laid out in IRS Publication 936.

The general circumstances to qualify for the deduction are:

  • You used part of the house as a home office (declare in your Schedule C)
  • You own a co-op apartment
  • You rent out part of your home
  • The home is a timeshare
  • Your home was under construction for part of the year
  • You used some mortgage proceeds to pay for other debts
  • Your home was destroyed during the tax year
  • You were divorced or separated but your ex must pay the mortgage on a home you both own (related to alimony)
  • You and anyone but your spouse paid for (and are liable for) interest paid on the mortgage

There are additional rules that depend on your residence type and your situation.

You can deduct interest on your mortgage for your principal residence that:

  • Is for a: 
    • House
    • Apartment
    • Co-op
    • Condo
    • Mobile home
    • House trailer
    • Houseboat
  • Has a mortgage secured by the property 
  • Has sleeping, cooking, and toilet facilities

There are many other stipulations laid out in Publication 936. Nontaxable housing allowance through the military can also be deducted.

If the mortgage is for a second home:

  • You don’t need to use the home for the entire year
  • The mortgage still needs to be secured by the property
  • If you rent out your second home, you need to live there at least 14 days or 10% of the number of days you rent it out during the tax year

Unfortunately, there are too many circumstances covered by the IRS to list out here. To make sure you are eligible for the deduction, you can read IRS Publication 936 or consult a financial professional.

Non-Deductible Expenses

You can only deduct interest on your mortgage. The mortgage interest deduction won’t cover:

  • Interest on a reverse mortgage
  • Forfeited deposits or down payments
  • Homeowner’s insurance
  • Title insurance

The deduction doesn’t cover settlement costs most of the time, but it can in some cases. If you are not sure, your mortgage lender will provide that information to you on the annual Form 1098.

How You Claim The mortgage interest deduction

First, you should receive Form 1098 in the mail, if you paid $600 or more in mortgage interest. Mortgage lenders typically mail them in the first 2 months of the year. Your Form 1098 will show how much you’ve paid in mortgage interest during the tax year. 

IMPORTANT – The IRS automatically receives a copy of your Form 1098, which they will use to match the information you report on your tax return.

Second, you need to be able to prove you fit into one of the situations listed above to deduct mortgage interest. So it is imperative you keep good records and have them on hand when filing your tax return.

Third, you need to itemize your taxes by claiming a mortgage interest deduction on Schedule A of Form 1040. That means you are opting to itemize your deductions instead of just claiming the standard deduction. It may take time to do this, and even more time to make sure doing so is worth it. If your standard deduction is more than your itemized deduction, you should save yourself some time and money by claiming the standard deduction.

Lastly, in some cases, you may qualify for special deduction rules. Some state and federal emergency loan programs can be subject to the mortgage interest deduction as well.

Next Steps

The intricacies surrounding the mortgage interest deduction can be overwhelming. In a few cases, it will be easy to claim it yourself. But contrary to what many people believe, not everyone is qualified to receive the deduction.

If you’re unsure of whether you can claim the deduction or how much you can claim, you should contact a tax professional. Consulting with Cerebral Tax Advisors and ensuring your tax returns are filed properly will save you a lot of time and can save you from the headache of making a mistake. Book a complementary Tax Discovery Session with Cerebral through this link today!