Home mortgage interest can make up most of your mortgage payments, especially during the early years of your loan term. It can quickly add up so you see little change to the amount of your loan principal for a while. The Internal Revenue Service allows taxpayers who itemize to claim the home mortgage interest deduction to account for this expense.
This tax benefit can work for various types of homes, but there are limits and rules to follow. Taking the mortgage interest tax deduction can require different processes depending on your situation. Take a look at this mortgage interest deduction guide to learn all about the basics.
Understanding the Mortgage Interest Deduction
The home mortgage interest deduction serves as a way to reduce your taxable income by letting you subtract the mortgage interest you paid during the tax year. The IRS also includes points and mortgage interest within this deduction. You can take the home mortgage interest deduction along with other itemized deductions, such as the property tax deduction, to help you get the most tax savings for your qualifying home.
Consider that you paid $12,000 in mortgage interest on your home in 2021 and you had an adjusted gross income of $50,000. You decide to itemize your deductions. Thanks to the home mortgage interest deduction, your taxable income would go down to $38,000 (your AGI less the interest expense). And you can increase your itemized deductions further with other things you spent money on during the tax year, such as charitable donations, property taxes, medical expenses (over 7.5 percent of your AGI) and state and local taxes paid up to $10,000.
This tax deduction can only be claimed if you own part or all of the property and have personally taken out the loan. It must be secured by the property. You can't deduct mortgage interest if you pay someone else's mortgage and live in their home as a nonowner. You must also meet various other criteria for the type of home and mortgage. There are limits to the amount of loan principal (mortgage debt) for which you can deduct the interest.
2021 Mortgage Interest Deduction Limits
You could deduct interest on up to $1 million in mortgage indebtedness before the Tax Cuts and Jobs Act took effect in 2018. The TCJA now limits this to $750,000 most filing statuses or $325,000 if you're married and file a separate return and you purchased the property after Dec. 15, 2017. The good news is that the earlier $1 million limit (halved to $500,000 for married filing separately) is still available if you bought your house before that deadline. And you don't have to worry about a limit at all if you bought it prior to October 13, 1987 because the IRS grandfathers such borrowers in.
The pre-TCJA mortgage limit could go back into effect for all taxpayers in 2025 when the law is set to expire if Congress doesn't take steps to renew all or portions of it.
Rules on Qualifying Properties
The property for which you're deducting interest must be your primary or second home. The IRS is flexible in that it allows for various structures, such as a standalone house, houseboat, trailer, condo or even a co-op, but it has some specific rules for your use of the properties.
Your primary residence must be livable and have appropriate toilet, sleeping and cooking facilities. You must allocate the deduction appropriately and fill out separate tax forms for residential versus business uses if you don't use the entire house as a residence, such as if you maintain a home office.
It's not required that you physically live at the property during the tax year to deduct interest on a secondary home, but the IRS no longer considers the place to be a personal residence if you rent the home out. This means you don't meet one of the criteria. The IRS will check that you've either lived there two weeks during the tax year or 10 percent more than the number of days it was rented. You'd have to deduct mortgage interest as a rental property expense rather than take the personal deduction for that home if the rental usage goes beyond that.
Qualifying Mortgage Loans
Your mortgage must be "home acquisition debt." This can include original and refinanced mortgages, along with home equity loans if certain criteria are met. Interest paid on reverse mortgages doesn't qualify. Your primary or secondary home must act as collateral for the loan, and you must have used the money to buy or build the place or to add major, permanent improvements.
These mortgages would qualify if you took out a $300,000 mortgage to have a primary residence built or you spent $500,000 to purchase an existing home to use as your secondary residence. But it gets trickier when you're dealing with a refinance or home equity loan and you use the funds for something other than your home.
A home equity loan would not qualify if you used the money to pay off credit cards or to fund your child's education. You couldn't deduct interest on the money if you used it for a vacation or just minor home repairs. But adding a swimming pool or new roof with the funds would qualify as major capital improvements and allow you to claim the mortgage interest deduction.
Rules for Points & PMI
Paying points when you take out your mortgage can help you save on interest throughout your loan's life, and the IRS treats them as interest you've prepaid. This money is deductible just like regular mortgage interest, but you must meet a long list of IRS criteria to deduct the whole point value at once in the tax year in which you paid the cost. You'll have to spread the cost over the loan's term, which means taking small deductions each year, if you can't meet the criteria.
One major rule is that you took the mortgage on a property where you reside most. The points must be paid for interest and not other costs such as taxes. You must have clear documentation of how the points were calculated.
Other rules deal with whether the points paid were normal and a usual amount for the area where your property is located, what payment source you used for the points and if you used a cash accounting method.
You can deduct PMI premiums along with deducting points. This tax perk initially expired after 2017, Congress has allowed a few extensions so it's currently available through the 2021 tax year, the year for which you'll file a tax return in 2022. You can deduct the whole PMI amount reported on the tax forms that your lender sends you.
Preparing to Deduct Mortgage Interest
You should first determine whether itemizing on your income tax return suits your tax situation. The standard deduction rose considerably with the passage of the TCJA. You'd get a $12,550 standard deduction in 2021 if you're single, which may be far more than the interest paid on your home. This increases to a $25,100 standard deduction if you're married and you and your spouse file a joint return. The total of your itemized deductions might not exceed the applicable amount for your filing status, so you'd be paying tax on more income than you have to if you choose to itemize your deductions instead.
Look at the Form 1098, Mortgage Interest Statement you should receive from your lender in late January to early February, if your mortgage interest was at least $600. You can still deduct the qualified interest if you don't get that form, but that would mean finding more documentation and would likely mean your mortgage interest deduction would be far less than taking the standard deduction.
You'll find your mortgage interest paid in box 1. Box 5 shows mortgage insurance premiums, while box 6 shows any points paid that year. You can find the mortgage acquisition date in box 3 in case you need to check to determine your limits for the year. You can proceed with filling out your tax return forms to report the expenses if you've added up your mortgage interest deduction along with all your other itemized deductions and determined that you'd be better off itemizing than taking the standard deduction.
Deducting Interest as Typical Homeowner
Deducting your home mortgage interest is a straightforward process once you have your Form 1098 and any other documents showing mortgage interest paid, assuming you're a typical homeowner who doesn't have a qualified home office and your home doesn't qualify as a rental property per IRS rules. Schedule A is the IRS form for reporting your itemized deductions. You must complete this before you can move the deduction over to your Form 1040 tax return.
Use the third section of Schedule A to input your home mortgage interest information. Use line 8a to enter the mortgage interest and points you had reported on a 1098 form and line 8d to list any PMI premiums. Use lines 8b and 8c to list the interest and points separately If you have qualified mortgage interest that wasn't included on a 1098 form. Tally up lines 8a through 8d. This is your total mortgage interest deduction amount.
You can continue working through Schedule A to report deductions such as charity gifts, local and state taxes, casualty and theft losses as well as dental and medical expenses. Add everything together to get a final figure on line 17. You can simply transfer that number to Form 1040, line 12a, in lieu of the standard deduction.
Deducting Interest in Special Situations
You must adjust your home mortgage interest deduction so you split the interest for the business and personal parts of the home if you reside there but have set space apart for business use. You'd use the standard method for deducting home office expenses when you're filling out your Schedule C. Put the business portion of home mortgage interest paid on line 16a. You could then fill out Schedule A to account for the remaining amount as a personal itemized deduction.
Read More: Guide to Home Office Deductions
Complete Schedule E to report your rental income along with all related expenses if you have a rental property that extends beyond the IRS allowance for renting personal residences. Enter the mortgage interest expense on line 12. You wouldn't qualify for the regular mortgage interest deduction for that property on your Schedule A.
- IRS: 2021 Publication 587 Business Use of Your Home
- IRS: 2021 Schedule C
- IRS: 2021 Form 1040
- IRS: 2021 Schedule A
- IRS: Publication 936 (2021), Home Mortgage Interest Deduction
- Tax Foundation: The Home Mortgage Interest Deduction
- IRS: Changes to the Deductibility of Mortgage Insurance Premiums (MIP)
- Rocket Mortgage: How to Claim Refinance Tax Deductions
- IRS: Topic No. 504 Home Mortgage Points
- IRS: Form 1098
- IRS: 2021 Schedule E
- IRS: IRS Provides Tax Inflation Adjustments for Tax Year 2021
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.