A Quick Guide to the Home Mortgage Interest Deduction

Owning a home comes with many perks, especially when it comes to taxes. If you itemize your deductions, you may reduce your taxable income by deducting the interest you pay on your home mortgage. Here’s a quick guide to get you started.

What is the home mortgage interest deduction?

The home mortgage interest deduction is a tax break for homeowners. The IRS allows a taxpayer to deduct the mortgage interest paid on home loans from their taxable income, resulting in a lower tax bill.

What qualifies as a home?

Taxpayers may only deduct the mortgage interest on qualified homes. This means your main home or your second home has to be collateral for the loan. 

The IRS definition of a home includes houses, mobile homes, recreational vehicles, condominiums, cooperatives, boats, and other similar properties that have sleeping, cooking, and toilet facilities.

If you rent out your second home, you must use it as a home for more than 14 days or more than 10% of the number of days you rented it out in one year to qualify for the mortgage interest deduction. Otherwise, it is considered rental property.

What loans qualify for the home mortgage interest deduction?

The loan must be used to buy, build, or renovate your home to qualify for the interest deduction. This could be a first mortgage, a second mortgage, a home equity loan, or a line of credit.

How much can I deduct from my taxable income?

Prior to tax year 2018, homeowners were able to deduct home mortgage interest on the first $1 million of debt ($500,000 if married filing separately. The Tax Cuts and Jobs Act reduced the maximum eligible amount for deductible interest to $750,000 of mortgage debt ($350,000 if married filing separately). However, taxpayers who took out a mortgage prior to December 15, 2017, will still fall under the old tax rules.

Mortgages on main homes or second homes that existed before October 13, 1987, are considered grandfathered debt. All interest paid on grandfathered debt is fully deductible.

Prior to tax year 2018, taxpayers had the option of deducting the interest on up to $100,000 in home equity debt, regardless of how they used the loan proceeds. For tax year 2018 and onwards, interest on home equity debt is no longer deductible if the loan proceeds were not used to buy, build, or substantially improve your home.

Who gets to claim a home mortgage interest deduction?

The person legally responsible for the loan and the payments, also known as the primary borrower, gets to take the deduction.

Single filers, heads of households, and those married filing jointly may deduct the interest on the first $750,000 of indebtedness. If the loan was taken out prior to December 15, 2017, the old maximum limit of $1 million applies.

Married taxpayers filing separately may deduct up to $375,000 each, or $500,000 each if the mortgage falls under the old tax rules.

Taxpayers who help pay for a family member’s mortgage may only take the interest deduction if they co-signed the loan.

What documents do I need?

Taxpayers who itemize their deductions need to substantiate their claims with supporting documents. When claiming a home mortgage interest deduction, you will need the following information that shows the interest you paid:

• Form 1098, Mortgage Interest Statement. Lenders send this form to borrowers to let them know how much mortgage interest or mortgage points they paid during the year.
• If you pay your mortgage interest to the person you bought your home from, you will need to provide their name, address, Social Security number, as well as the interest or points you paid during the year.
• If you refinanced your mortgage, you will need the closing statement from the lender.

How to maximize my home mortgage interest deduction?

With all the IRS rules and exceptions surrounding real properties, debt, and deductions, filing a tax return as a homeowner can be incredibly complicated. If you want to maximize your homeowner tax deductions, your best option is to ask a reputable tax service for expert help.

For over 25 years, the tax experts at TFX have helped American homeowners make the most of their tax returns. Our team is renowned for its fast service and in-depth knowledge of the United States tax system. You can rely on our team to provide the best tax service for your situation.

Veronica Rhodes from TFX

TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.