What Are the Tax Implications of Holding a Mortgage?

For homeowners, a mortgage is intertwined with the U.S. tax system, offering opportunities to reduce annual tax liability. The tax code provides several benefits that can make owning a home more affordable. However, realizing these savings requires navigating specific rules, limits, and reporting requirements.

Primary Mortgage-Related Tax Deductions

The mortgage interest deduction allows homeowners to deduct the interest paid on their home loan, but it is subject to limitations. The deduction is limited to the interest paid on up to $750,000 of mortgage debt, or $375,000 for those married and filing separately. This debt must be “acquisition indebtedness,” meaning it was used to buy, build, or substantially improve a primary or second home. For mortgages obtained before December 16, 2017, a higher limit of $1 million applies.

Another deductible expense is the payment of “points,” a form of prepaid interest where one point equals 1% of the loan amount. If points are paid on a mortgage to purchase or build a primary home, they can often be deducted in full in the year they were paid. This deduction is contingent on meeting several IRS tests, such as ensuring the payment of points is an established business practice in the area and that the funds to pay them did not come from the lender.

Homeowners also pay property taxes, which are often collected by the mortgage lender through an escrow account. These real estate taxes are deductible on a federal tax return, but this deduction falls under the State and Local Tax (SALT) deduction. The SALT deduction is capped at $10,000 per household per year, or $5,000 for married individuals filing separately. This cap includes property taxes as well as state and local income or sales taxes, which can limit the benefit for homeowners in high-tax areas.

Other Tax Benefits and Debt Considerations

Private Mortgage Insurance (PMI) is required by lenders when a homebuyer makes a down payment of less than 20%. The deduction for PMI premiums has been available in the past but is subject to periodic renewal by Congress. The provision allowing this deduction expired at the end of 2021, so it is not currently deductible unless lawmakers extend it.

The Mortgage Interest Credit is a dollar-for-dollar reduction of taxes owed and is targeted toward lower-income individuals. To be eligible, a homebuyer must have received a Mortgage Credit Certificate (MCC) from a state or local government agency before obtaining their mortgage. If a taxpayer claims this credit, they must reduce their mortgage interest deduction by the amount of the credit claimed.

Interest on home equity debt, such as a home equity loan or a Home Equity Line of Credit (HELOC), is only deductible if the loan proceeds are used to buy, build, or substantially improve the home that secures the loan. Using a HELOC for a kitchen remodel would allow for an interest deduction, but using it to consolidate credit card debt would not. The interest is also subject to the same overall debt limits as the primary mortgage.

Allocating Expenses for Specific Home Uses

When a home is used for more than a primary residence, homeowners must allocate expenses like mortgage interest and property taxes. For individuals who operate a business from their home, a portion of these housing costs may be deductible as a business expense. The home office deduction requires allocating expenses based on the portion of the home used exclusively and regularly for business. A common allocation method is based on square footage.

A similar allocation is required when a homeowner rents out part of their home. The homeowner must divide mortgage interest and property taxes between personal and rental use. The rental portion of these expenses is deducted on Schedule E (Form 1040), which is used to report income and expenses from rental real estate. This allocation can be based on days rented or by square footage.

A homeowner can deduct mortgage interest on a second home, provided it is not rented out or is used personally for a sufficient amount of time. The $750,000 limit on acquisition debt is a combined limit for both the primary and second home. If a second home is rented out, the rules become more complex and depend on the number of days it is rented versus used personally.

Tax Events When Selling or Refinancing

When selling a primary residence, homeowners can exclude a significant amount of the profit, or capital gain, from their income. The Home Sale Exclusion allows single filers to exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000. To qualify, the homeowner must have owned and lived in the home as a primary residence for at least two of the five years before the sale.

Refinancing a mortgage has tax implications for mortgage points. Unlike points on an original home purchase, points paid to refinance a mortgage must be deducted over the life of the new loan. For example, if $3,000 in points were paid on a 30-year refinance, the homeowner would deduct $100 per year for the duration of the loan.

If a lender forgives a portion or all of a homeowner’s mortgage debt, such as in a foreclosure, this forgiven amount is considered taxable income. The lender reports this to the taxpayer and the IRS on Form 1099-C, Cancellation of Debt. Homeowners may be able to avoid paying tax on this forgiven amount if the debt is discharged in bankruptcy or to the extent the taxpayer is insolvent. A provision available through 2025 also allows for the exclusion of up to $750,000 of canceled mortgage debt on a primary residence, or $375,000 for a married person filing separately.

Reporting Mortgage Information on Your Tax Return

Each year, lenders are required to send Form 1098, Mortgage Interest Statement, to any borrower who paid $600 or more in mortgage interest. This form details the total amount of mortgage interest, points paid, and sometimes property taxes paid through an escrow account. This document is the primary source for the figures needed to complete the tax return.

Claiming these deductions takes place on Schedule A of Form 1040, which requires a taxpayer to itemize their deductions. To receive a tax benefit, the total of all itemized deductions must be greater than the standard deduction for their filing status. For the 2025 tax year, the standard deduction is $30,000 for married couples filing jointly and $15,000 for single filers. If a homeowner’s total itemized deductions do not exceed their standard deduction, they will not see a tax savings from their mortgage expenses.