Can You Deduct Mortgage Interest From Your Taxes?

Kelly Hernandez
A tax form sits under some cash and a tiny model home.

If you make monthly mortgage payments for your home, it’s important to learn about specific tax benefits you may qualify to receive. Between your down payment, closing costs, monthly mortgage payments, and potential home repairs, owning a home is expensive.

Ensuring you’re saving money on taxes in every way possible is helpful. The mortgage interest you pay may be deducted from your taxes, decreasing your tax liability and potentially making it more financially beneficial to buy a home instead of renting.

Table of Contents

What Is the Mortgage Interest Deduction?

The mortgage interest deduction is a tax deduction you can take advantage of when you file your tax return with the Internal Revenue Service (IRS). If you meet the qualifications, the amount of tax liability you owe for the year is reduced by the amount you paid in mortgage interest for your home.

Keep your mortgage records so you can prove the interest you paid qualifies for this tax deduction. This also ensures you claimed the correct amount of interest for the year.

What Qualifies for Mortgage Interest Deduction?

It’s crucial to calculate the mortgage interest you paid for the year correctly to ensure you’re claiming the appropriate tax refund or paying the proper tax liability to the IRS. To claim mortgage interest, make sure the interest you claim meets the IRS’s strict eligibility requirements.

If you’re attempting to claim a mortgage interest deduction for the mortgage interest you paid on your main home, it must be one of the following:

  • Co-op;
  • Apartment;
  • Condominium;
  • House trailer;
  • Mobile home;
  • House boat;
  • Home.

To qualify, the home must have at least one bathroom facility, cooking area, and sleeping quarters and it must be placed as collateral for the loan. If you get a divorce and obtain a new mortgage to take over full ownership of a home, you also qualify to deduct the mortgage interest you pay throughout the year. Housing allowances you receive through the military or ministry are nontaxable and you can deduct the mortgage interest you paid from your taxes as well.

To deduct mortgage interest on a second home, it must be collateral for the loan but you don’t have to live there. If you rent the home, you can only deduct the mortgage interest if you stay there for at least 10% of the number of days it’s rented or at least 14 days.

You can also deduct mortgage points from your tax liability over the life of the mortgage or all at once, as long as they meet the qualifications. You qualify to deduct the mortgage insurance premiums you paid if the income you claim on your taxes is $109,000 and you’re filing jointly or $54,500 and you’re filing separately from your spouse. Prepayment penalties, late payment charges, and the interest you paid on a home equity loan also qualify for the tax deduction.

Are Closing Costs Tax Deductible?

If you haven’t added up all the costs of buying a home, closing costs may come as an unpleasant surprise. While these costs are part of homeownership, they don’t qualify for a tax deduction with the IRS. Additional expenses you may incur throughout the homebuying and homeownership process that don’t qualify for the tax deduction include the following:

  • Title insurance;
  • Additional principal mortgage payments;
  • Earnest money;
  • Deposits;
  • Down payments;
  • Interest you accrued on a reverse mortgage;
  • Title insurance;
  • Homeowner’s insurance premiums.

Mortgage Interest Deduction Limit

There are limits to the amount of mortgage interest you can deduct from your taxes, even if you qualify to claim this deduction. Generally, you can deduct the eligible mortgage interest you paid throughout the year on the first $1 million of your mortgage debt.

You can only deduct mortgage interest from your taxes on the first $750,000 of your home’s mortgage debt if it was purchased after December 15, 2017. However, the IRS still treats your case as closing before December 15, 2017 if all of the following statements are true:

  • You entered into a legally binding contract on your home before December 15, 2017.
  • Your contract confirms that you were set to close on the home on January 1, 2018 or sooner.
  • You closed on the home on or before April 1, 2018.

In this situation, you’re still eligible to deduct taxes on the mortgage interest you paid throughout the year on the first $1 million of your mortgage debt.

How to Claim the Mortgage Interest Deduction

In January or early February, your mortgage company sends you Form 1098 by mail. This form is important because it outlines the amount of mortgage interest you paid throughout the year, as well as the number of points you paid. A copy of this form is also sent to the IRS so the interest you claim must match this form exactly.

If you’re in a complex situation, it’s crucial to keep good records that relate to your mortgage. If you rented out part of your home, used part of the home as an office, or the home is a timeshare, you may qualify to deduct the interest you paid. If you claim the interest as a deduction in one of these situations, you may be asked to provide proof.

When you claim a mortgage interest tax deduction, you can’t claim a standard deduction. You must itemize or schedule your deductions by completing Schedule A of Form 1040. You must list out all qualifying deductions and add them up to calculate the deduction you can claim on your taxes. This calculation should include your mortgage interest tax deduction.

Mortgage Interest Deduction Tax Form

Form 1098, Mortgage Interest Statement, is the form your lender sends at the beginning of the year. It provides you with details on the amount of mortgage interest you paid throughout the past year. You’ll only receive this form if you paid more than $600 in mortgage interest in the past year.

Review the form to ensure it’s correct and all mortgage interest you paid is included. You can use the figure your mortgage company provides on the form to claim the tax deduction with the IRS when you itemize your deductions on Form 1040. If you don’t receive this form by February and you know you paid more than $600 in mortgage interest throughout the year, contact your lender to request it.

If you qualify to deduct mortgage interest from your taxes, it will reduce your tax liability. The home buying process and homeownership responsibilities are expensive, so this tax relief can help you stay on budget.

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