Mortgage FAQ

How to Deduct Mortgage Interest: What Qualifies and How to File

Learn how to leverage the tax benefits of homeownership.

How to Deduct Mortgage Interest: What Qualifies and How to File

    One of the great benefits of owning a home are the tax breaks that come along with it.

    As you may already be aware, the U.S. tax code offers a tax break to homeowners who pay mortgage interest as an incentive for citizens to take out a mortgage and buy property, as opposed to just renting.

    If you itemize your deductions using Schedule A of IRS Form 1040, you can deduct some or all of the mortgage interest you paid during the year. In this article, we'll cover the details of what is eligible and what is not eligible, and also explain how you can claim this deduction when you're filing your tax returns.

    What is the Mortgage Interest Deduction?

    The mortgage interest deduction acts as a tax incentive for homeownership. Homeowners can reduce their taxable income with this itemized deduction. The interest paid on loans related to building, purchasing, or improving a primary residence can be deducted to lower taxable income. By lowering your taxable income, you'll also reduce the amount of income tax owed in most situations. The mortgage interest deduction also applies for second homes, with certain limitations.

    Mortgage Interest Deduction Limits

    While the mortgage interest deduction is nothing new, the Tax Cuts and Jobs Act (TCJA), which went into effect in 2017, changed some details. Before 2017, homeowners could deduct the interest on up to $1 million of mortgage debt, but the TCJA reduced that amount to $750,000.

    The mortgage's origination date will determine the limits that apply to the deduction.

    • Any mortgage taken out before October 13, 1987 is grandfathered debt. All of the interest paid is fully tax-deductible, with no limit on the amount or the size of the mortgage.
    • Any mortgage opened between October 13, 1987 and December 16, 2017 is eligible for the $1 million limit ($500,000 each, if married and filing separately).
    • Any mortgage opened after December 16, 2017 falls under the current rules of the TCJA, and the $750,000 limit applies ($375,000 each, if married and filing separately).

    Which Loans Qualify for the Deduction?

    IRS Publication 936 includes all of the details and qualification requirements. Here is the essential information:

    • The following types of properties and homes are eligible for the deduction: house, condominium, cooperative, mobile home, house trailer, boat, or similar property with sleeping, cooking, and toilet facilities.
    • If your house includes a home office used for business purposes, Publication 587 provides details about calculating the deduction.
    • You're still eligible for the deduction if you receive a non-taxable housing allowance (for example, through the military).
    • You can't deduct mortgage interest paid for you through mortgage assistance payments for lower-income families under section 235 of the National Housing Act.
    • Generally, any interest accrued on a reverse mortgage is considered interest on home equity debt and isn't deductible.

    The deduction applies to mortgages, construction loans, home equity loans, home equity lines of credit, and second mortgages. You can deduct interest from refinanced loans as long as all of the qualifications are met. To qualify, the loan must be secured by the home, and the loan must be for the purpose of building, purchasing, or improving the home.

    What's Not Deductible?

    Some other costs of purchasing or owning a home are often mistakenly claimed as deductions. You cannot use the following expenses to reduce your taxable income:

    • Homeowners insurance premiums
    • Title insurance and other settlement or closing costs
    • Moving expenses
    • Additional payments you make to pay down the principal of your loan
    • Interest payments from a reverse mortgage
    • Payments made while you're living in the home before finalizing the purchase (these payments are considered rent)

    How to Claim the Mortgage Interest Deduction

    When you file your taxes, you'll have the choice to take the standard deduction or to itemize your deductions. Opting for the standard deduction is easier, but you'll be better off going with itemized deductions if your deductions exceed the standard deduction amount.

    The standard deductions for 2021 are as follows:

    • $12,550 for single filers
    • $25,100 for married, filing jointly
    • $12,550 for married, filing separately
    • $18,800 for heads of households

    Itemized deductions can include things like:

    • Mortgage interest
    • Real estate taxes
    • Property taxes
    • State and local income or sales taxes
    • Disaster losses from a Federally declared disaster
    • Medical and dental expenses
    • Charitable giving

    Suppose the total of your itemized deductions exceeds the standard deduction you're eligible for. In that case, it makes sense to opt for the itemized deductions. You'll need to itemize deductions if you want to deduct your mortgage interest payments.

    Itemizing your deductions requires you to fill out additional forms and provide documentation that supports and verifies the legitimacy of the deductions. Although there is some extra work involved, it's generally not complicated. The leading DIY tax software programs will handle itemized deductions and lead you through the process. Of course, if you work with a CPA or tax professional, they will help with the details as well.

    The more interest you pay for your mortgage or home equity loan, the more likely it will be that you'll benefit from itemizing. However, it makes sense to add up all of the valid deductions that you can itemize and see how it compares to your standard deduction. Then, go with the deduction (standard or itemized) that offers the most significant reduction of your taxable income.

    Form 1098

    Mortgage lenders must provide you with Form 1098 if you paid more than $600 of interest (for the year) on a mortgage, home equity loan, or home equity line of credit. You should automatically receive a copy of the form each year by mid-February.

    Form 1098 shows exactly how much you paid in interest through the previous year, which serves as proof for your itemized deduction.

    If you paid less than $600 of interest, you could still itemize the deduction, but you'll need to request Form 1098 from your lender.

    Completing the Required Schedules

    If you choose to itemize your deductions, you'll need to complete Schedule A (Form 1040). This form lists all of the deductions that you're itemizing, including mortgage interest. Use the numbers from the Form 1098 provided by your lender as the mortgage interest deduction on Schedule A.

    Suppose you're deducting the mortgage interest from a rental property. In that case, you'll need to complete Schedule E. If you use part of your home for business purposes, you may need to complete Schedule C as well.

    Final Thoughts

    If you own a home, the mortgage interest deduction may be an easy way to decrease the amount of income tax you need to pay. Add up all of the itemized deductions that you're eligible for. If it exceeds your standard deduction, go ahead and itemize it when you file your taxes.

    If it sounds confusing, don't be intimidated. Tax preparation software will lead you through the process so you'll know exactly what you can deduct and the forms you'll need to complete.