What is the mortgage interest deduction?
The mortgage interest deduction is a tax deduction for mortgage interest paid on the first $1 million of mortgage debt. Homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return.
Here’s a look at how it works and how you can save money at tax time.
How the mortgage interest deduction works in 2022
The mortgage interest deduction allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year. So if you have a mortgage, keep good records — the interest you’re paying on your home loan could help cut your tax bill.
As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.
For example, if you got an $800,000 mortgage to buy a house in 2017, and you paid $25,000 in interest on that loan during 2021, you probably can deduct all $25,000 of that mortgage interest on your tax return. However, if you got an $800,000 mortgage in 2021, that deduction might be a little smaller. That’s because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.
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.
What qualifies as mortgage interest?
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, apartment, condo, mobile home, house trailer or a houseboat.
- 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 one of eight requirements.
- In general, the eight requirements are that the mortgage has to be for a your main home, paying points is an established practice in your area, the points aren’t unusually high, the points aren’t for closing costs, your down payment is higher than the points, the points are computed as percentage of your loan, the points are on your settlement statement and you use the cash method of accounting when you do your taxes.
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.
- You may face a penalty for paying off your mortgage early, but you may also be able to deduct the penalty as interest.
Interest on a home equity loan
- You have to use the money from the home equity loan to buy, build or “substantially improve” your home.
- If you use the money to buy a car, pay down credit card debt, or pay for something else not home-related, the interest isn’t deductible (learn more about deducting home equity loan interest).
Mortgage insurance premiums
- This includes the amount paid for private mortgage insurance, FHA mortgage insurance premiums, USDA loan guarantee fees and VA funding fees.
- The insurance contract must have been issued after 2006.
- You can’t deduct the cost of mortgage insurance if your adjusted gross income is more than $109,000, or $54,500 if married filing separately, on Form 1040 or 1040-SR, line 8b.
- The amount you can deduct is reduced if your adjusted gross income is more than $100,000 ($50,000 if married filing separately).
What’s not deductible
- 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
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 sends you a Form 1098 in January or early February. It details how much you paid in mortgage interest and points during the tax year. Your lender 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 1098 if you paid $600 or more of mortgage interest (including points) during the year to the lender. (Learn more about Form 1098 here.) 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 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 itemize and 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. (Read more about itemizing versus taking the standard deduction.)
Schedule A allows you to do the math to calculate your deduction. Your tax software can walk you through the steps.
4. See if you qualify for special deduction rules. If you got help from a state housing finance agency “Hardest Hit Fund” program or an Emergency Homeowners’ Loan Program (the state or the Department of Housing and Urban Development administers that), you may be able to deduct all of the payments you made on your mortgage during the year.
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