Mortgage interest deduction: What you need to know

We take an in-depth look at the homeowner tax incentive

Mortgage interest deduction: What you need to know

What is mortgage interest deduction?

The mortgage interest deduction is a tax incentive for homeowners on the mortgage interest paid on the first $1 million of mortgage debt. Homeowners can deduct interest on the first $750,000 of the mortgage if they purchased their homes after December 15, 2017.

 It should be noted that you have to itemize on your tax return in order to claim the mortgage interest deduction. The mortgage interest deduction essentially lets homeowners count interest paid on loans for purchasing, building, or improving their primary home against their taxable income. Ultimately, this lowers the amount of taxes you owe, and, within limits, can be taken on loans for second homes.

Since a mortgage interest deduction lets you reduce your taxable income by the amount you have paid in mortgage interest throughout the year, the interest you are paying on your home loan might help cut your tax bill.

Mortgage interest deduction limit

The mortgage interest deduction limit was signed in 2017, when the Tax Cuts and Jobs Act, or TCJA, lowered the mortgage deduction limit, altering individual income tax, and placing a limit on the amount you may deduct from your home equity loan debt.

Prior to the Tax Cuts and Jobs Act, the limit for mortgage interest deduction was $1 million. In 2022, however, the limit dropped to $750,000, meaning that this tax year, married couples filing together and single filers can deduct the interest as high as $750,000. Married taxpayers filing separately can deduct has high as $375,000 each.

The exceptions to the mortgage interest deduction limit include:

- Mortgages taken out prior to October 13, 1987, are called grandfathered debt and are not limited, meaning all of the interest paid is deductible;

- Homes bought after October 13, 1987, and prior to December 16, 2017, are eligible for the previous $1 million limit. If married and filing separately, that number becomes $500,000 each; and

- Homes sold prior to April 1, 2018, are still eligible for the $1 million limit—if there was a binding contract signed prior to December 15, 2017, that closed prior to January 1, 2018, and the house was bought prior to April 1, 2018.

What qualifies as mortgage interest?

What qualifies as deductible mortgage interest includes the following:

Interest on the mortgage for your primary home. Your primary home could include an apartment, a condo, a house, a mobile home, a co-op, and a houseboat. Properties that do not qualify as your primary home are properties that don’t have basic living accommodations, such as bathroom, cooking, and sleeping facilities. Additionally, the property must be listed as collateral for the loan you are deducting interest payments from. It also applies if you have a mortgage to buy out an ex-partner’s half of the property following a divorce.

Interest on the mortgage for a second home. So long as your second home is listed as collateral for that mortgage, you can use the mortgage interest deduction on a mortgage for a home that is not your primary residence. If you rent out your second home, however, you must live there for more than 14 days, more than 10% of the days you rent it out, or whichever option is longer. You can only deduct the interest from one home if you have more than one second home.

Mortgage points you have paid. You might have the option to pay mortgage points when you take out a mortgage, meaning you can pay a portion of your loan interest in advance. Points usually cost roughly 1% of your mortgage amount and can earn you roughly 25% off your mortgage rate. To qualify you for the deduction, mortgage points must be paid at closing and directly to the lender. In some cases, mortgage points can be deducted during the same year they’re paid.

How to claim the mortgage interest deduction

To claim the mortgage interest deduction, you can take the following steps:

Form 1098. In January or early February, your mortgage lender will send you a Form 1098, detailing how much you paid in mortgage interest and points during the tax year. The lender will also send a copy to the IRS to match up what you report on your tax return.

Keep records. You might also be able to claim mortgage interest deduction if you were a co-op apartment owner, used a portion of your house as a home office, rented out a portion of your home, the home was a timeshare, or a portion of the home was under construction that year.

Other circumstances include the home being destroyed during the year or the homeowner using a portion of the proceeds to pay off debt or invest. Being divorced or separated but having to pay interest on a co-owned home might also qualify an individual for mortgage interest deduction, as well as you and someone who isn’t your spouse not being liable but paying the mortgage interest on your house.

Itemize taxes. If you claim the mortgage interest deduction on Schedule A of Form 1040, you will need to itemize rather than take the standard deduction when you file your taxes.

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