What is a mortgage interest deduction?
The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, buy or improve their home from taxable income. The mortgage interest deduction can also be applied to loans for second homes and vacation homes with certain limitations. The amount of deductible mortgage interest is reported annually by the mortgage company on Form 1098. This deduction is offered as an incentive to homeowners.
Key points to remember
- Mortgage deductions help homeowners reduce the amount of tax owed.
- These deductions are reported in Schedule A or Schedule E, depending on the type of deduction.
How mortgage interest deduction works
Residential mortgage interest is reported in Schedule A of tax form 1040. Mortgage interest paid on rental properties is also deductible, but this is shown in Schedule E. Residential mortgage interest is often the only itemized deduction which allows many taxpayers to detail; without this deduction, the other detailed deductions would not exceed the standard deduction. Interest on home equity loans is also considered mortgage interest.
Eligibility for a full mortgage interest deduction
Oftentimes, homeowners can deduct all of their mortgage interest paid, as long as they meet all the requirements. The amount allowed for the deduction depends on the date of the mortgage, the amount of the mortgage and how the proceeds of that mortgage are used.
As long as the owner’s mortgage meets the following criteria throughout the year, all mortgage interest can be deducted. Grandfathered debt, that is, mortgages taken out on a date set by the Internal Revenue Service (IRS), is eligible for the deduction.
Mortgages that the owner or their spouse, if they jointly file, took out after the date of “acquired debt” to buy, build or improve the house may be eligible. However, these mortgage loans throughout the tax year, as well as any grandfathered debt, totaled no more than $ 1 million. For married couples filing separately, the limit is $ 500,000 or less.
Mortgage deductions can also be made on loans for second homes and vacation homes, but there are limits.
For mortgages that a homeowner or their spouse (again, if they jointly deposit) took out after the grandfather date as home equity debt (but not as home debt home purchase) totaling no more than $ 100,000 – or if they file separately and are married $ 50,000 and under throughout the tax year – mortgage interest may qualify for the deduction if the debt does not exceed the fair market value of the house after certain adjustments.
The mortgage interest deduction can only be taken if the owner’s mortgage is a guaranteed debt, which means that he has signed a trust deed, mortgage or land contract that makes their property a qualified housing guarantee for payment of debt and other stipulations.