Deducting Mortgage Interest FAQs

You can usually deduct the interest you pay on a mortgage for your main home or a second home, but there are some restrictions.

Here are the answers to common questions about this deduction:

• What counts as mortgage interest?
• Is my house a home?
• Who gets to take the deduction?
• Is there a limit to the amount I can deduct?
• What if my situation is special?
• What kind of loans get the deduction?
• What if I refinanced?
• What kind of records do I need?

What counts as mortgage interest?

Mortgage interest is any interest you pay on a loan secured by a main home or second home. These loans include:

• A mortgage to buy your home
• A second mortgage
• A line of credit
• A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay isn't deductible.

Is my house a home?

For the IRS, a home can be a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.

Your home mortgage must be secured by your main home or your second home. You can't deduct interest on a mortgage for a third home, a fourth home and so on.

Who gets to take the deduction?

You do, if you are the primary borrower, you are legally obligated to pay the debt and you actually make the payments. If you are married and both you and your spouse sign for the loan, then both of you are primary borrowers. If you pay your son's or daughter's mortgage to help them out, however, you cannot deduct the interest unless you co-signed the loan.

Is there a limit to the amount I can deduct?

Yes, your deduction is limited if all mortgages on your home total either:

• More than the fair market value of your home
• More than $1 million ($500,000 if you're married and filing separately from your spouse)

Your deduction may also be limited if your home-equity loans are more than $100,000 ($50,000 if you're married and filing separately).

In the above cases, your deduction may be limited. For details, see IRS Publication 936: Home Mortgage Interest Deduction.

What if my situation is special?

Here are a few special situations you may encounter.

• If you have a second home that you rent out for part of the year, you must use it for more than 14 days or for more than 10 percent of the number of days you rented it out at fair market value (whichever number of days is larger) for the home to be considered a second home for tax purposes. If you use the home you rent out for fewer than the required number of days, your home is considered a rental property, not a second home.
• You may treat a different home as your second home each tax year, provided each home meets the qualifications noted above as your residence.
• If you live in a house before your purchase becomes final, any payments you make for that period of time are considered rent. You cannot deduct those payments as interest, even if the settlement papers label the payments as interest.
• If you used the proceeds of a home loan for business purposes, enter that interest on Schedule C if you are a sole proprietor, and on Schedule E if used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used.
• If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can't be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
• If you used the proceeds of a home mortgage to purchase or "carry" securities that produce tax-exempt income (municipal bonds) , or to purchase single-premium (lump-sum) life insurance or annuity contracts, you cannot deduct the mortgage interest. (The term "to carry" means you have borrowed the money to substantially replace other funds used to buy the tax-free investments or insurance.)

What kind of loans get the deduction?

If all your mortgages fit one or more of the following categories, you may deduct all of the interest paid on your mortgages.

• Mortgages you took out on your main home and/or a second home on or before October 13, 1987 (called "grandfathered" debt, because it covers any mortgages that existed before the laws were changed in 1987).
• Mortgages you took out after October 13, 1987 to buy, build or improve your main home and/or second home (called acquisition debt), plus grandfathered debt that totaled $1 million or less throughout 2007 ($500,000 if you are married and filing separately from your spouse).
• Mortgages you took out after October 13, 1987, other than to buy, build or improve your main home and/or second home (called home equity debt) that totaled $100,000 or less throughout 2008 ($50,000 if you are married and filing separately from your spouse), and all of the mortgages on the home totaled no more than its fair market value.

If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct in that situation, see IRS Publication 936:  Home Mortgage Interest Deduction.

What if I refinanced?

If you had a grandfathered mortgage and refinanced it, the mortgage balance replaced by the new mortgage remains grandfathered.The excess is treated as home equity debt and is deductible to the extent that your total home equity debt does not exceed $100,000 ($50,000 if you are married and filing separately from your spouse).

Example: Your principal mortgage balance on October 13, 1987 was $51,000. On April 15, 1989 you borrowed $101,000. You used that money to pay the existing loan (which had a balance of $49,000) and all your credit cards, then used the rest of the loan proceeds to buy a new car. Of the total amount borrowed, $49,000 is grandfathered and $52,000 is a home equity loan.

When you refinance a mortgage, you deduct the points you pay to get the new loan over the life of the loan. That means you can deduct 1/30th of the points each year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense on a prorated basis over the life of the new loan.

What kind of records do I need?

In the event of an IRS inquiry, you'll need the records that document the interest you paid. These include:

• Copies of Form 1098: Mortgage Interest Statement, showing the interest and points you paid this year.
• Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
• The name, Social Security number and address of the person you bought your home from, if you pay your mortgage interest to that person, as well as the amount of interest you paid for the year.
• Your federal tax return from last year, if you refinanced your mortgage last year or earlier, and if you're deducting the eligible portion of your interest over the life of your mortgage.

Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid and, if you purchased your home in the current year, any deductible points you paid. Sometimes these forms don't look like tax forms; scan the statement you get in January looking for the words "Form 1098."

If you paid more interest than your Form 1098 shows, you must attach a statement to your tax return that explains why you're deducting more than your lender reported on Form 1098.

Updated for 2008