Key Takeaways
- When you repay a mortgage loan, you typically can deduct the interest part of your payments. This is true if the loan meets IRS mortgage rules.
- You can usually deduct mortgage interest on your tax return. The loan must be secured by your home. The loan's proceeds must be used to buy, build, or improve your main residence. It can also be used for one other home you own and use for personal purposes.
- Mortgage interest for a rental home typically doesn't qualify as an itemized deduction on your tax return. But it usually qualifies as a rental expense deduction.
- You can deduct mortgage interest from new loans for your personal residence on your tax return. But, the deduction is limited to the first $750,000 of the loan..
Mortgage interest deduction
When you repay a mortgage loan, the payments are mostly interest. This is true in the first few years. Even later on, the interest portion can still be a significant part of your payments. However, you can deduct the interest that you pay if the loan meets IRS mortgage requirements.
Mortgage loan requirements
You can deduct the interest from your mortgage payments when you file a tax return, but only if the loan is secured by your home. Also, the loan proceeds must have been used to buy, build, or improve your main home and one other home you own and use for personal purposes.
If you rent out your second home to tenants, it's not being used for personal purposes. So, it doesn't qualify for the mortgage interest deduction on your tax return. However, a rental home will qualify if you also use it as a residence for 15 days or more per year or over 10 percent of the days you rent it to tenants.
TurboTax Tip:
Mortgage discount points usually are deductible in the year that you purchase the home. If not, you typically can deduct them over the repayment period.
Mortgage Interest Tax Deduction Limit
The IRS places several limits on the amount of interest that you can deduct each year on your tax return.
- For tax years before 2018, you can deduct the interest paid on up to $1 million of acquisition debt if you itemize on your tax return. The interest on an additional $100,000 of debt can be deductible if certain requirements are met.
- Starting in 2018, deductible interest for new loans is limited to principal amounts of $750,000. Loans from before December 16, 2017, or under a contract that closes before April 1, 2018, follow the old rules, for tax years before 2018.
- If you're married and file a separate return from your spouse, then the limitation is cut in half. These limits are cumulative for all of your mortgage debt on both homes. For example, if you're single and have an $800,000 mortgage on your main home and a $400,000 mortgage on your summer home, you could only deduct the interest on the first $1 million. Both loans are each under the $1,000,000 limit for tax years prior to 2018.
Including mortgage points
Mortgage discount points are also called prepaid interest. They are fees you pay at closing to get a lower mortgage rate. You can usually deduct these costs in the year you buy the home. If not, you can deduct them pro rata over the repayment period. For example, if you pay $3,000 in points to get a lower mortgage rate, you can increase your mortgage interest deduction by $3,000 in the tax year you close on the home.
How to claim the home mortgage interest deduction
Follow these steps to claim your mortgage interest deduction:
- Decide between the Standard Deduction and itemized deductions. Choosing the Standard Deduction means fewer forms. You also don't need to prove your deductions. It offers a predetermined amount that varies by filing status. For the tax year 2023, the amounts are:
- $14,600 for filing as Single or Married Filing Separately
- $29,200 for filing as Married Filing Jointly
- $21,900 for filing as Heads of Household
Choosing an itemized deduction lets you pick from various deductions. These include charitable donations and medical expenses. You need to fill out extra forms for this option. You also need to provide proof for each deduction. Both deduction types lower your taxable income.
- Obtain form 1098 from your mortgage lender. Your mortgage lender or servicer will give you Form 1098. It details your paid mortgage interest and points for the year. This form is essential for your mortgage interest deduction claim. If you haven't received this form by mid-February, contact your lender. If you need help understanding it, also contact your lender.
- Select the appropriate tax forms. To claim the mortgage interest deduction, list it on Schedule A (Form 1040). You must itemize your deductions to do this. You need different forms for income from your home, like rental or business use.
- Schedule E (Form 1040): Use this for deducting interest on rental properties.
- Use Schedule C (Form 1040 or 1040-SR for those 65 or older). Use it if part of your home is a home office or if your mortgage funds your business.
Example of mortgage interest deduction decision making. Deciding whether to itemize or take the Standard Deduction depends on which saves more. Consider a Single filer with the following deductions: mortgage interest ($9,500) and charitable contributions ($2,500). These total $12,000. Here, the $14,600 Standard Deduction (2023) is better. It cuts taxable income by an extra $2,600.
But, if the mortgage interest was $13,000 and charitable contributions $3,000, totaling $16,000, itemizing would be better. It would save an extra $2,150 over the Standard Deduction.
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