Can You Write Off Mortgage Interest?
Understanding the mortgage interest deduction is key for homeowners. See how eligibility and loan details determine if you can lower your taxable income.
Deducting mortgage interest is a tax benefit for homeowners that lowers their taxable income by the amount of interest paid on a home loan during the year. The rules and requirements can change based on tax legislation, so it is important for homeowners to stay informed about current standards.
Rules for Deducting Mortgage Interest
To deduct mortgage interest, a taxpayer must choose to itemize deductions rather than taking the standard deduction. This choice involves comparing the total of all itemized deductions, including mortgage interest, state and local taxes, and charitable contributions, against the standard deduction for their filing status. If the total itemized deductions exceed the standard deduction, itemizing results in a lower tax liability, as the mortgage interest deduction is unavailable to those who opt for the standard deduction.
The interest must be for a loan on a qualified home, which the IRS defines as a main home and one second home. A property qualifies as a home if it includes sleeping, cooking, and toilet facilities. This can range from a house to a condominium, cooperative apartment, mobile home, or even a boat. A taxpayer can only have one main home at any given time, which is the property where they live most of the time.
Another condition is that the mortgage must be a secured debt, meaning the qualified home serves as collateral for the loan. This arrangement gives the lender a claim on the property if the borrower fails to make payments. This requirement ensures that the debt is directly tied to the home itself for the interest to be deductible.
The amount of interest that can be deducted is subject to limits based on when the mortgage was taken out. For mortgages obtained before December 16, 2017, interest on up to $1 million of debt is deductible ($500,000 if married filing separately). For mortgage debt taken on after December 15, 2017, this limit is $750,000 ($375,000 if married filing separately). This debt must be for a home acquisition loan used to buy, build, or substantially improve a qualified home.
Interest on a home equity loan or a home equity line of credit (HELOC) is only deductible under specific circumstances. The funds from the loan must be used to buy, build, or substantially improve the home that secures the loan. If the proceeds are used for other personal expenses, such as paying off credit card debt or taking a vacation, the interest is not deductible.
Deductible Items and Required Documentation
The primary document needed to claim the mortgage interest deduction is Form 1098, the Mortgage Interest Statement. Lenders are required to issue this form to any borrower who has paid $600 or more in mortgage interest during the year. Box 1 of this form reports the total mortgage interest received by the lender, which is the figure needed for a tax return.
Form 1098 also provides information about mortgage points, which are a form of prepaid interest. Box 6 of the form shows the amount of points paid on the purchase of a principal residence. These points are deductible, but the timing of the deduction depends on several factors, as points can sometimes be fully deducted in the year they are paid.
If the tests for a full, immediate deduction are not met, the points must be deducted over the life of the loan. This process, known as amortization, involves spreading the deduction out evenly across the loan’s term. For example, if a taxpayer paid $3,000 in points on a 30-year mortgage, they would deduct $100 per year.
Homeowners should gather all Forms 1098 received from their mortgage lenders. If a homeowner has more than one mortgage, they will receive a separate Form 1098 for each loan. Identifying the amounts in Box 1 and Box 6 is the preparatory step before filing.
Claiming the Deduction on Your Tax Return
Once you determine you qualify to deduct mortgage interest and have your Form 1098, you report the deduction on your tax return. The mortgage interest deduction is claimed on Schedule A (Form 1040), Itemized Deductions. This schedule is filed with Form 1040 to report various itemized deductions.
The amount from Box 1 of your Form 1098 is entered on line 8a, “Home mortgage interest and points reported to you on Form 1098.” If you have multiple Forms 1098 from different lenders, you will add the amounts from Box 1 of each form and enter the total on this line.
There are specific lines for less common situations. If you paid mortgage interest to a seller who financed your loan and did not receive a Form 1098, you report this interest on line 8b. For points not reported on Form 1098, such as those you are amortizing, you would calculate the deductible portion for the year and include it on line 8c.
After entering all applicable mortgage interest and points on the designated lines, the amounts are totaled with other itemized deductions on Schedule A. The final sum of all itemized deductions is then transferred to your Form 1040. This total reduces your adjusted gross income, ultimately lowering your tax liability for the year.