Mortgage Interest Tax Deduction: What Qualifies and How Much

What is the mortgage interest deduction?

The mortgage interest deduction is a tax deduction for interest paid on mortgage debt.

Mortgage interest deduction limit

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 filing separately, you can only deduct the interest you paid on the first $375,000 of your mortgage^[0]

If you bought the house before Dec. 16, 2017, you can deduct the interest you paid during the year on the first $1 million of the mortgage ($500,000 if married filing separately).

• Note: There’s an exception to that Dec. 15, 2017, cutoff: If you entered into 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 prior to Dec. 16, 2017.

» MORE: Find a financial advisor who can help you strategize about your tax situation

How much is my mortgage interest deduction?

You can find a summary of your mortgage interest payments on Form 1098, which your mortgage lender should send out around the end of January^[0]

» MORE: See if you also qualify for the SALT deduction

Mortgage interest tax deduction example

Here’s an example of the calculation.

Let’s assume you take out an $800,000 mortgage with a 30-year term at a fixed 6.0% interest rate. Using an amortization calculator, we can calculate that during the first year of the mortgage, you’ll pay $47,732.76 in mortgage interest. However, because the IRS limits the deduction to the interest on the first $750,000 of the mortgage, you can only deduct $44,749.46.

The higher the tax bracket you're in, the more this deduction is worth to you. For example:

• If you’re in the 24% tax bracket, this deduction could save you about $10,700 (that’s 24% of $44,749). 

• If you’re in the 32% tax bracket, this deduction could save you about $14,320 (32% of $44,749).

• If you’re in the 34% tax bracket, you could save even more – about $15,214 (34% of $44,749).

» MORE: Advantages of putting the house in a trust

What qualifies for the mortgage interest deduction?

IRS Publication 936 has all the details, but here’s the list in a nutshell.

Interest on a mortgage for your main home

• The property can be a house, co-op, condo, mobile home, house trailer, houseboat or an apartment.

• The home has to be collateral for the loan.

• The home must have sleeping, cooking and toilet facilities to count.

• If you get a nontaxable housing allowance from the military or through the ministry, you can still deduct your home mortgage interest.

• A mortgage that you get in order to “buy out” your ex’s half of the house in a divorce counts.

Interest on a mortgage for your second home

• You don’t have to use the home during the year.

• The house has to be collateral for the loan.

• If you rent out the second home, you have to be there for the longer of at least 14 days or more than 10% of the number of days you rented it out.

Points you paid on your mortgage

• Points are a form of prepaid interest on your loan. You can deduct points little by little over the life of a mortgage, or you can deduct them all at once if you meet every requirement.

Late payment charges on a mortgage payment

• You can deduct a late payment charge if it wasn't for a specific service performed in connection with your mortgage loan.

Prepayment penalties

• You may face a penalty for paying off your mortgage early, but you may also be able to deduct the penalty as interest.

» This quiz can help you see if it's time to get a financial advisor

How to claim the mortgage interest deduction

You’ll need to take the following steps.

1. Look in your mailbox for Form 1098

Your mortgage lender should send you a Form 1098 in January or early February. It details how much you paid in mortgage interest and points during the previous year. Your lender also sends a copy of that 1098 to the IRS, which will try to match it up to what you report on your tax return.

You will get a Form 1098 if you paid $600 or more of mortgage interest (including points) during the year to the lender. You may also be able to get year-to-date mortgage interest information from your lender’s monthly bank statements.

2. Keep good records

The good news is that you may be able to deduct mortgage interest in the situations below under certain circumstances:

• You used part of the house as a home office (you may need to fill out a Schedule C and claim even more deductions).

• You were a co-op apartment owner.

• You rented out part of your home.

• The home was a timeshare.

• Part of the house was under construction during the year.

• You used part of the mortgage proceeds to pay down debt, invest in a business or do something unrelated to buying a house.

• Your home was destroyed during the year.

• You were divorced or separated and you or your ex has to pay the mortgage on a home you both own (the interest might actually be deemed alimony).

• You and someone who is not your spouse were liable for and paid mortgage interest on your house.

The bad news is that the rules get more complex. Check IRS Publication 936 for the details, or consult a qualified financial advisor or tax pro. Be sure to keep records of the square footage involved, as well as what income and expenses are attributable to certain parts of the house.

3. Itemize on your taxes

You claim the mortgage interest deduction on Schedule A of Form 1040, which means you'll need to itemize instead of take the standard deduction when you do your taxes.

That can also mean spending more time on tax prep, but:

• If your standard deduction is less than your itemized deductions, you should consider itemizing to save money anyway.

• If your standard deduction is more than your itemized deductions (including your mortgage interest deduction), take the standard deduction and save yourself some time.

Schedule A allows you to do the math to calculate your deduction. Your financial advisor or tax preparer can walk you through the steps.