Can You Write Off Mortgage Interest on Your Taxes?

Understanding the tax implications of mortgage interest can significantly impact a homeowner’s financial planning. The ability to write off mortgage interest on taxes provides an opportunity for potential savings, making it a key consideration during tax season. This deduction has been a staple in U.S. tax law, offering homeowners relief by reducing taxable income.

Basic Requirements for Deductibility

To benefit from the mortgage interest deduction, taxpayers must meet specific criteria set by the Internal Revenue Service (IRS). The mortgage must be secured by a qualified residence, which includes a primary or second home. A qualified residence provides basic living accommodations, such as sleeping, cooking, and toilet facilities. Investment or rental properties are excluded from this deduction.

The deduction is available only to those who itemize deductions on Schedule A of Form 1040. Taxpayers must forego the standard deduction, which has increased in recent years, making itemization less common. As of 2024, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. The decision to itemize depends on whether total deductible expenses exceed these thresholds.

The Tax Cuts and Jobs Act of 2017 imposed a cap on the amount of mortgage debt eligible for interest deduction. For loans taken out after December 15, 2017, interest can only be deducted on the first $750,000 of mortgage debt for married couples filing jointly, or $375,000 for single filers. This cap, a reduction from the previous $1 million limit, particularly affects homeowners in high-cost housing markets.

Types of Qualified Loans

Understanding the types of loans that qualify for the mortgage interest deduction is essential for optimizing a tax strategy. The IRS recognizes several loan categories, including primary mortgages, home equity loans, and refinancing arrangements.

Primary Mortgage

A primary mortgage is the most common type of loan eligible for the mortgage interest deduction. This loan is used to purchase a primary residence, subject to the $750,000 cap for loans originated after December 15, 2017. Loans predating this date may still qualify under the previous $1 million limit. Taxpayers should maintain accurate records of mortgage interest payments, which are reported on Form 1098 by the lender.

Home Equity

Home equity loans and lines of credit (HELOCs) can also qualify for the deduction, but only if the funds are used to buy, build, or substantially improve the home securing the loan. The combined total of the primary mortgage and home equity loan must not exceed the $750,000 limit for post-2017 loans. Taxpayers should document the use of home equity loan proceeds to ensure compliance with IRS requirements.

Refinancing

Refinancing a mortgage can also impact interest deductibility. When a homeowner refinances, the new loan replaces the original mortgage, and the interest on the new loan is deductible under certain conditions. If the refinanced amount does not exceed the original loan’s outstanding principal, the interest remains fully deductible, subject to the $750,000 cap for post-2017 loans. If the refinancing results in a higher loan balance, interest on the additional amount is deductible only if used for home improvements. Detailed records of the refinancing transaction, including the original loan balance and the use of additional funds, are essential.

Documentation and Tax Forms

Proper documentation is crucial for successfully claiming the mortgage interest deduction. Form 1098, provided by lenders, details the amount of interest paid over the year and serves as the primary evidence for the deduction. Taxpayers must verify its accuracy.

The deduction is reported on Schedule A of Form 1040, which requires a comprehensive list of itemized deductions. Taxpayers should maintain meticulous records of all expenses claimed to substantiate the itemization decision. Additional documentation, such as proof of home improvements for home equity loans, may also be required. In cases where the IRS questions the deduction, having detailed records readily available minimizes issues during audits.

When Property Use Affects Deductibility

The use of property can significantly influence the deductibility of mortgage interest, particularly when the property serves multiple functions. For homeowners using their properties as a mix of personal residence and business, such as a home office, the IRS requires precise calculations of the portion of the home used exclusively for business. This portion of the mortgage interest may be deductible as a business expense, separate from the personal mortgage interest deduction.

For properties rented out for part of the year, the IRS considers them rental properties during the rental period if rented for more than 14 days annually. In such cases, the mortgage interest must be divided between personal and rental use. The interest attributable to the rental period is deducted as a rental expense on Schedule E, while the remainder is claimed on Schedule A for personal use.

Points and Other Loan Charges

Mortgage points and other loan-related charges can also affect the amount of deductible interest. Points, or discount points, are fees paid at closing in exchange for a reduced interest rate. Each point equals 1% of the loan amount. Points may be deductible in the year they are paid if certain IRS conditions are met, such as being paid in cash and not financed. The home must be the taxpayer’s primary residence, and the loan must be used to purchase or improve the home.

Other loan charges, such as origination or application fees, are generally not deductible as interest. Only the interest portion of these charges qualifies. Taxpayers should carefully review their closing statements to identify deductible fees. Additional charges like late payment fees or prepaid interest may also be deductible, provided they are documented and reported accurately. Understanding these nuances helps homeowners maximize deductions and avoid common errors.