Having a mortgage allows you to lower your taxable income by deducting the amount of mortgage interest you've paid throughout the year. It's important to maintain accurate records, as the interest on your home loan can potentially reduce your tax bill.
In general, you can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married and filing separately, the limit drops to $375,000.
What is the mortgage interest deduction?
The mortgage interest deduction allows you to deduct the interest paid on the first $750,000 of mortgage debt. To claim this deduction, you will need to itemize on your tax return.
If you purchased your home before Dec. 16, 2017, you can deduct the interest paid on the first $1 million of the mortgage ($500,000 if married filing separately).
There is an exception to the Dec. 15, 2017, cutoff: If you had a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained before Dec. 16, 2017.
An example of a Mortgage interest tax deduction
If you obtained an $800,000 mortgage to purchase a house in 2017 and paid $25,000 in interest on the loan in 2023, you may be able to deduct the entire $25,000 of mortgage interest on your 2023 tax return. However, if you obtained an $800,000 mortgage in the same year, the deduction might be slightly lower. This is because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.
What qualifies as mortgage interest?
IRS Publication 936 provides in-depth information on qualifying mortgage interest, and here's a concise summary for your reference.
- The property eligible for the mortgage interest deduction includes houses, co-ops, apartments, condos, mobile homes, house trailers, and houseboats.
- The property must serve as collateral for the loan.
- Additionally, the property must provide sleeping, cooking, and toilet facilities to qualify for the deduction.
- If you receive a nontaxable housing allowance from the military or a ministry, you can still claim the deduction for your home mortgage interest.
- Moreover, a mortgage taken out to buy out your ex-partner's share of the property in a divorce situation is also considered eligible for the deduction.
Interest on a mortgage for a second home
The second home does not need to be occupied during the year, but it must serve as collateral for the loan. If you decide to rent out the second home, you must be present for at least 14 days or more than 10% of the days it is rented out.
Points you paid on the mortgage
Points represent prepaid interest on your loan, allowing you to deduct them gradually over the mortgage's lifespan or all at once if you meet specific requirements.
These requirements generally include the mortgage being for your primary residence, points being a common practice in your area, points not being excessively high, using the cash accounting method for taxes, points not covering closing costs, a higher down payment than the points, points calculated as a percentage of your loan, points listed on your settlement statement, and not being paid instead of other items on the statement like appraisal, inspection, title, or attorney fees, or property taxes.
Prepayment penalties
What's not deductible?
In the American mortgage system what cannot be deducted is:
-
Homeowners insurance.
-
Extra principal payments you make on your mortgage.
-
Title insurance.
-
Settlement costs (most of the time).
-
Deposits, down payments, or earnest money that you forfeited.
-
Interest accrued on a reverse mortgage.
Mortgage insurance premiums.
How to claim the mortgage interest deduction
If you paid more than $600 in mortgage interest last year, be on the lookout for a Form 1098 from your mortgage lender in the upcoming weeks (early 2024). The IRS will also receive a copy of this form. Homeowners typically report the amount on line 8a of Schedule A (Form 1040). However, the allowable deduction amount may vary in certain situations, such as if the property does not meet the criteria of a qualified home.
To claim the mortgage interest deduction, make sure to itemize your deductions on Schedule A. Compare the total of your itemized deductions, including mortgage interest, to the standard deduction amount for your filing status. Only choose to itemize if your total deductions exceed the standard deduction.
For more information about claiming the mortgage interest tax deduction, see IRS Publication 936.
Tax-related content
How we can help you
At H&CO, our experienced team of tax professionals understands the complexities of income tax preparation and is dedicated to guiding you through the process. With offices in Miami, Coral Gables, Aventura, Tampa, Orlando, and Fort Lauderdale, our CPAs are readily available to assist you with all your income tax planning and tax preparation needs. To learn more about our accounting firm services take a look at our individual tax services, business tax services, international tax services, expatriate tax services, SAP Business One, entity management, human capital, and audit and assurance services.
