The mortgage interest deduction allows you to reduce your taxable income by the mortgage interest you paid during the year. (Photo: The Mortgage Reports)
What exactly is a mortgage interest deduction?
The mortgage interest deduction is a tax break for interest paid on the first $750,000 of mortgage debt. Homeowners who purchased their homes before December 16, 2017, can deduct interest on the first $1 million of their mortgage. To claim the mortgage interest deduction, you must itemize your tax return.
The Mortgage Interest Deduction in Action
The mortgage interest deduction allows you to reduce your taxable income by the mortgage interest you paid during the year.
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What is considered mortgage interest?
The IRS Publication 936 contains all the details, but here’s a summary.
Mortgage interest on your primary residence:
- A house, co-op, apartment, condo, mobile home, house trailer, or houseboat can be used as the property.
- The house must be used as collateral for the loan.
- To count, the house must have sleeping, cooking, and toilet facilities.
- You can still deduct your home mortgage interest if you receive a nontaxable housing allowance from the military or the ministry.
- A mortgage obtained to “buy out” your ex’s half of the house during a divorce counts.
Mortgage interest on your second home:
You are not required to use the house during the year.
The house must be used as collateral for the loan.
If you rent out your second home, you must stay for at least 14 days or more than 10% of the days you rented it out for.
Mortgage points that you paid
- Points are a type of prepaid loan interest. You can deduct points incrementally over a mortgage or deduct them all at once if you meet all nine requirements.
- In general, the nine requirements are that the mortgage is for your primary residence, that paying points is an established practice in your area, that the points aren’t unusually high, that you use the cash method of accounting when doing your taxes, that the points aren’t for closing costs, that your down payment is greater than the points, that the points are computed as a percentage of your loan, that the points are on your settlement statement, and that the points were not paid in lieu of amounts shown separately.
Charges for late mortgage payments:
If the late payment was not for a specific service performed in connection with your mortgage loan, you can deduct it.
Penalties for early payment:
If you pay off your mortgage early, you may face a penalty, but you may also be able to deduct the penalty as interest.
A home equity loan’s interest rate:
The money from the home equity loan must be used to buy, build, or “substantially improve” your home. The mortgage interest deduction is not deductible if you use the money to buy a car, pay off credit card debt, or for anything else that isn’t related to your home.
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