Where Does Mortgage Interest Go on a Tax Return?

Homeownership comes with tax benefits, and one of the most significant is the ability to deduct mortgage interest. This deduction can reduce taxable income, potentially lowering the amount owed to the IRS. Understanding the correct placement of mortgage interest on a tax return ensures compliance with IRS rules while maximizing savings.

Where to Enter Mortgage Interest on Schedule A

Mortgage interest is reported on Schedule A (Form 1040), Itemized Deductions, which allows taxpayers to deduct eligible expenses instead of taking the standard deduction. The interest paid on a qualified home loan is entered on line 8a if reported on Form 1098, the Mortgage Interest Statement. Lenders issue this form by January 31 each year, detailing the total interest paid in the previous tax year. If the mortgage interest was not reported on Form 1098, it must be entered on line 8b, along with the lender’s name, address, and taxpayer identification number.

For those with multiple mortgages, each loan’s interest must be reported separately. If multiple Form 1098s are received, the total interest from all forms is combined and entered on line 8a. If any portion of the mortgage interest is from a seller-financed loan, where the seller acts as the lender, the borrower must provide the seller’s Social Security number or Employer Identification Number to claim the deduction. The IRS may disallow the deduction if this information is missing.

Mortgage insurance premiums, which were deductible in prior years, are no longer eligible for deduction as of 2022. Home equity loan interest is only deductible if the loan was used to buy, build, or improve the home securing the loan. If the funds were used for personal expenses, such as paying off credit card debt, the interest is not deductible.

Reporting Points and Origination Charges

Borrowers often encounter points and origination charges when securing a mortgage. Points, also known as discount points, are prepaid interest that can reduce the loan’s interest rate. Origination charges are fees lenders charge for processing the loan and are generally not deductible as mortgage interest. The IRS allows points to be deducted in the year they were paid if specific conditions are met, such as the loan being secured by a primary residence and the payment of points being customary in the area. Otherwise, the deduction must be spread over the life of the loan.

Deductible points are typically included on Form 1098, but if they are not, taxpayers must manually calculate and report them on Schedule A, line 8c. Points paid by the seller on behalf of the buyer can still be deducted by the buyer, even though they did not directly pay them. However, this deduction requires an adjustment to the home’s basis, meaning the purchase price used for future capital gains calculations must be reduced by the amount of seller-paid points.

Origination charges, often listed as underwriting or processing fees, are considered part of the cost of obtaining a loan rather than interest. Since these fees do not represent prepaid interest, they are not deductible. Some lenders may label certain fees as “points” even if they do not meet the IRS definition of prepaid interest, so it is important to review the loan settlement statement carefully.

Considerations for Second Homes

Mortgage interest on a second home is deductible if the property qualifies as a personal residence. To meet this standard, the home must not be rented for more than 14 days per year or, if rented beyond that limit, must be used personally for at least 10% of the total days it was rented to retain its classification as a residence. If the property fails this test, it may be considered a rental property, subjecting it to different tax treatment.

The mortgage debt limit for deductions also applies to second homes. As of 2024, taxpayers can deduct interest on up to $750,000 of combined mortgage debt across both a primary and secondary residence for loans taken after December 15, 2017. For older loans, the previous $1 million cap may still apply. If total mortgage debt exceeds the applicable threshold, only a portion of the interest is deductible, requiring a proration based on the allowable limit.

Refinancing a second home introduces additional considerations. If a refinanced loan includes cash-out proceeds used for expenses unrelated to home improvement, the interest on that portion is not deductible. Unlike a primary residence, where certain tax benefits may apply, second homes do not qualify for exclusions on forgiven mortgage debt, meaning any canceled debt may be considered taxable income.

Distinguishing Rental or Investment Properties

Mortgage interest on rental or investment properties is not deducted on Schedule A but instead reported on Schedule E (Form 1040), Supplemental Income and Loss. Rental properties generate income, making mortgage interest a business expense rather than a personal deduction. Unlike owner-occupied homes, where interest deductions are limited by mortgage debt caps, rental property interest is fully deductible, provided the loan is used exclusively for acquiring, maintaining, or improving the property.

Depreciation further differentiates rental properties. The IRS requires owners to depreciate residential rental properties over 27.5 years, allowing a portion of the property’s value (excluding land) to be deducted annually. Mortgage interest is separate from depreciation but must be considered when calculating net rental income or loss. If rental expenses, including interest, exceed rental income, the resulting loss may be deductible, subject to passive activity loss (PAL) limitations. Taxpayers with adjusted gross income (AGI) below $150,000 may deduct up to $25,000 in passive losses annually, but those exceeding this threshold face restrictions unless they qualify as real estate professionals.

Effect of Refinancing or Loan Modifications

Refinancing a mortgage or modifying an existing loan can change how mortgage interest is deducted, depending on how the new loan proceeds are used. The IRS distinguishes between acquisition debt, which is used to buy, build, or improve a home, and home equity debt, which is used for other purposes. Interest on refinanced loans remains deductible only if the new loan replaces acquisition debt and does not exceed the outstanding balance of the original loan. If any portion of the refinanced amount is used for personal expenses, such as paying off credit cards or covering tuition, the interest on that portion is not deductible.

Loan modifications, which often involve changes to interest rates or loan terms, can also impact deductions. If a modification results in capitalized interest—where unpaid interest is added to the loan principal—only interest paid in cash during the year is deductible. Additionally, if a lender forgives a portion of the loan balance, the forgiven amount may be considered taxable income unless an exclusion applies, such as under the Mortgage Forgiveness Debt Relief Act for primary residences. Points paid on a refinanced loan must generally be amortized over the life of the loan rather than deducted in the year paid, unless the refinance is for the same home and the loan is used solely for home improvements.