The Home Interest Tax Deduction: What it Is and How it Works
Interest paid on mortgages is tax-deductible. If your itemized deductions are greater than the standard deduction, you will want to itemize in order to save the as much money as possible at tax time. You can report mortgage interest paid on IRS Form 1040, Schedule A. You will report the home interest deduction in the same way that you report all of your other tax deductions – including taxes paid for real estate, medical and dental expenses, and charitable contributions – on this form.
Most homeowners will find the calculation of the mortgage interest to be straightforward, but if you bought or sold property during the tax year, it's generally a good idea to seek the advice of a tax professional to ensure you are calculating the interest correctly.
Your mortgage lenders will send you Form 1098, Mortgage Interest Statement, which shows the amount of mortgage interest that you paid during the tax year. If you paid points, make sure to factor them into the calculation of mortgage interest, even if not reported on Form 1098.
Do You Qualify for a Mortgage Interest Tax Deduction?
Home loan interest that is tax-deductible includes the amount of interest paid on home loans, home equity loans and new construction loans – but the amount of interest you are allowed to deduct from your taxes is limited. If you own more than one home, you may take a mortgage interest deduction on your first and second home, but not on any others.
To qualify for a mortgage interest tax deduction, you must itemize your tax deductions with Schedule A and be the person legally responsible for making mortgage payments. You may not take a mortgage interest tax deduction on interest paid for someone else's mortgage, even if you made the payments for them.
The mortgage must also be what is considered a "qualified" home in order to be eligible as a tax-deductible expense. Qualified homes include any properties with sleeping, cooking and toilet facilities, and may be called by a variety of names such as a house, mobile home, cooperative, boat or condominium.
Limitations for Mortgage Interest Tax Deductions
In addition to being limited to two homes for mortgage interest tax deductions, the amount of interest that you can deduct annually is also limited. There are different limitations for home acquisition debts than there are for home equity debts.
For home acquisition, you are allowed to deduct interest up to $1,000,000 of money used to buy or build a qualified home. If you file "married filing separately," the amount is reduced to $500,000.
For home equity debt, you may deduct interest on up to $100,000 for your first or secondary residence. Home equity debt is not used to buy or build a home, but is money borrowed against the value of your home. The home equity debt limitation is reduced to $50,000 if you are filing "married filing separately."
Mortgage Points Tax Deductions
If you pay mortgage points for acquisition debt on your primary or secondary residence, you can fully deduct the points paid on your taxes during the year in which they are paid. Points paid for refinancing mortgage loans are amortized over the life of the loan.
