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About Tax Deductions for a Mortgage

Updated for Tax Year 2017


OVERVIEW

You can deduct the interest that you pay on your mortgage loan if the loan meets IRS mortgage requirements.


 

The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.

 

When you repay a mortgage loan, the payments are almost completely composed of interest rather than principal in the first few years. Even later on, the interest portion can still be a significant portion of your payments. However, you can deduct the interest that you pay if the loan meets IRS mortgage requirements.

Mortgage loan requirements

In order for your mortgage payments to be eligible for the interest deduction, the loan must be secured by your home, and the proceeds of the loan must have been used to buy, build or improve your main residence, plus one other home you own that you also use for personal purposes.

If you rent out your second home to tenants during the year, then it’s not being used for personal purposes and doesn’t qualify for the mortgage interest deduction. However, rental homes will qualify if you also use it as a residence for the greater of 15 days or more per year or more than 10 percent of the days you rent it to tenants.

Mortgage balance limitations

The IRS places several limits on the amount of interest that you can deduct each year. If you took out the mortgage before Oct. 14, 1987, all of the interest on the mortgage can be deducted regardless of the amount you borrow. For all other mortgages, you can only deduct the interest that accrues on the first $1 million of mortgage loans.

If you are married and file a separate return from your spouse, then the limitation decreases to $500,000. These limits are cumulative for all of your mortgage debt on both homes. For example, if you are single and have a mortgage on your main home for $800,000, plus a mortgage on your summer home for $400,000, you would only be able to deduct the interest on the first $1 million, even though both loans are each under the $1,000,000 limit.

Including mortgage points

Mortgage discount points, also known as prepaid interest, are generally the fees you pay at closing to obtain a lower interest rate on your mortgage. These costs are usually deductible in the year that you purchase the home; but if not, you can deduct them ratably over the repayment period. For example, if you pay $3,000 in points to obtain a lower interest rate on your mortgage, you can increase your mortgage interest deduction by $3,000 in the tax year you close on the home.

Claiming the mortgage interest deduction

You cannot claim a mortgage interest deduction unless you itemize your deductions. This requires you to use Form 1040 to file your taxes, and Schedule A to report your itemized expenses. The interest payments and points you pay are combined with all other deductions you claim on Schedule A; the total of which reduces your income that is subject to tax on the second page of your tax return.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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