Why Is My Mortgage Interest Not Deductible?

Many homeowners assume they can deduct mortgage interest on their taxes, but not everyone qualifies. The IRS has specific rules that determine eligibility, and several common situations can make the deduction unavailable.

Loan Exceeds Deduction Limit

The IRS limits how much mortgage interest can be deducted based on the total loan amount. For mortgages taken out after December 15, 2017, interest is deductible only on the first $750,000 of qualified home loans ($375,000 if married filing separately). Any interest paid on loan amounts above this threshold is not deductible.

For example, if a homeowner has a $1 million mortgage and pays $40,000 in interest annually, only 75% of that interest—$30,000—can be deducted. The remaining $10,000 is considered personal interest and is not eligible. This cap applies to the combined mortgage debt across all properties, meaning loans on both a primary and secondary home must stay within the limit.

Mortgages issued before the 2017 Tax Cuts and Jobs Act follow the previous $1 million cap ($500,000 for married filing separately). If a homeowner refinances a pre-2017 loan without increasing the principal, the old limit still applies. However, if additional funds are borrowed, the new $750,000 cap applies to the excess amount.

Standard Deduction Is Higher

Many taxpayers no longer benefit from itemizing deductions, including mortgage interest, because the standard deduction has increased significantly. For 2024, the standard deduction is $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household. These amounts adjust annually for inflation, making it harder for itemized deductions to exceed the standard threshold.

To deduct mortgage interest, total itemized deductions—including state and local taxes (capped at $10,000), medical expenses exceeding 7.5% of adjusted gross income, and charitable contributions—must surpass the standard deduction. Many homeowners find that even with mortgage interest, their total deductions do not exceed the standard amount.

This shift particularly affects homeowners with lower mortgage balances or those who purchased homes at lower interest rates. For instance, a homeowner with a $300,000 mortgage at a 3.5% interest rate pays about $10,500 in annual interest. Without significant state taxes or charitable contributions, itemizing may not be worthwhile.

Non-Qualified Home Equity Debt

Interest on home equity loans or lines of credit (HELOCs) is deductible only if the borrowed funds are used for home improvements that increase the property’s value, such as adding a room or remodeling a kitchen. If the loan is used for personal expenses like paying off credit card debt, funding a vacation, or covering college tuition, the interest is not deductible.

Tracking how home equity funds are spent is necessary to determine deductibility. If a homeowner takes out a $50,000 HELOC and uses $30,000 for renovations while spending the remaining $20,000 on personal expenses, only the interest on the $30,000 portion is deductible. Proper recordkeeping, including receipts and contractor invoices, is required to substantiate claims in case of an IRS audit. Without documentation, the entire interest amount could be disallowed.

Improper Secured Loan Structure

For mortgage interest to be deductible, the loan must be secured by a qualified residence, meaning the home serves as collateral. If a loan is structured as an unsecured personal loan rather than a mortgage or HELOC tied to the property, the interest is not deductible.

Another issue arises when borrowing against a property the taxpayer does not legally own or use as a primary or secondary residence. For example, if a parent takes out a mortgage in their name for a child’s home but does not hold ownership interest, they cannot deduct the mortgage interest, even if they make the payments. Similarly, if someone co-signs a loan but does not make payments or hold ownership rights, they generally cannot claim a deduction.

Missing Mortgage Records

Proper documentation is required to claim a mortgage interest deduction. The IRS typically requires Form 1098, which lenders issue annually to borrowers, as proof of interest payments. If this form is missing or incorrect, taxpayers must provide alternative records such as mortgage statements, bank transaction histories, or canceled checks.

Issues can also arise with private lenders, such as seller-financed transactions or loans from family members. In these cases, the borrower must report the lender’s name, address, and taxpayer identification number on their tax return. If the lender fails to report the interest income, the IRS may disallow the deduction. Keeping detailed records of loan agreements and payment schedules helps ensure compliance and avoid disputes.