Mortgage interest tax deduction: how much mortgage interest can I deduct?

Most taxpayers can deduct all of their mortgage interest each year. Read on to find out how deducting mortgage interest can save you money on your taxes.

Published March 26, 2019

A tax deduction reduces your taxable income. That means if you made $80,000 during the tax year and claimed $20,000 in deductions, then you only have to pay taxes on $60,000. Taxpayers who have a mortgage may be eligible to claim a mortgage interest tax deduction.

Most homeowners can deduct all their mortgage interest. However, if your mortgage debt is above a certain amount, the deductible interest is proportional to the amount of your mortgage that falls within the threshold.

For mortgages taken out after October 13, 1987, and before December 16, 2017, mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt. For mortgages taken out after December 15, 2017, the threshold has been lowered to the first $750,000 of mortgage debt.

You can see how much mortgage interest you paid during the year on the mortgage statement your lender is required to send you, or on Form 1098, which you may receive if you paid more than $600 in interest. Because of amortization, the amount of mortgage interest you pay every year should decrease, as regular payments chip away more and more at the principal balance.

Read on to learn how to claim the mortgage interest tax deduction:

How much mortgage interest can I deduct on my taxes?

The Internal Revenue Service (IRS) uses three categories to determine how much mortgage interest you can deduct:

Category 1

Any mortgage taken out on or before October 13, 1987, which is called grandfathered debt. All interest paid on this category of mortgage is fully deductible regardless of your mortgage amount.

Category 2

Mortgages taken out on or after October 14, 1987, which, with very limited exceptions, have a threshold of $1,000,000 (or $500,000 if your filing status is married filing separately). In this category, interest paid on mortgages is only deductible up to the proportion of the mortgage that comprises $1,000,000. To qualify, the mortgage must be to “buy, build, or substantially improve your home,” which the IRS calls home acquisition debt.

Category 3

Mortgages taken out on or after December 16, 2017, which have a threshold of $750,000 (or $375,000 if your filing status is married filing separately). Mortgages must also be home acquisition debt, as defined above. Interest paid on mortgages in this category is only deductible up to the proportion of the mortgage that comprises $750,000.

Other mortgage payments you can deduct

Some types of payments related to paying your mortgage can be included as interest for the purpose of claiming the deduction. You report these as if they were interest payments at the time you file your taxes, using Schedule A, Itemized Deductions, for Form 1040.

Refinancing

If you refinance your mortgage, you’re essentially taking out a new mortgage to pay off the old mortgage. For that reason, you can continue deducting mortgage interest based on the amount you pay under the new loan, except for any part of the refinance you receive as cash or any refinance-related fees.

Some of those other payments include:

  • Late payment fees
  • A prepayment penalty, which your lender may charge to you if you pay off your mortgage too early
  • Interest paid for part of the year if you sold your home during the year, including short sales but not foreclosures
  • Prepaid interest, such as discount points, but only for their respective tax years, if applicable

Deducting mortgage points

Mortgage points are a cost of both fixed-rate and adjustable-rate mortgages that home buyers pay at closing. Some are mandatory, such as loan-origination fees that cover the lender’s costs.

Other mortgage points are optional, like discount points, which you can pay up front to reduce your interest rate over the life of the mortgage to save you money in the long run. One point is equal to 1% of the mortgage principal; each point reduces your interest rate by about 0.25%.

You can deduct points along with interest, but not necessarily all at once. The IRS uses two categories to determine how much of your points payments you can deduct:

  • Deduction allowed in year paid: if the points you paid meet a nine-point test of eligibility, you can fully deduct points in the year you paid them.

  • Deduction allowed ratably: “Ratably” means spreading the points deduction equally across the life of the loan, as long as your loan qualifies. If your points payments don’t satisfy the tests in the previous category, then you may have to use this category.

If you qualify to use either points deduction category, you can choose the deduction you want to claim. The points deduction is claimed in the same section of Schedule A as mortgage interest, but on a different line.

Points are a complex facet of the mortgage process. Talk to a tax professional to learn about claiming a deduction for mortgage points on your taxes, or use taxation software like TurboTax to do the math automatically.

Points you can’t deduct

Certain fees associated with taking out a mortgage can’t be deducted if they’re charged for mortgage-related services. These include charges like appraisal fees, notary fees, and title search fees. When these fees are paid as points, those points are not deductible.

Prior to the passage of the Tax Cuts and Jobs Act of 2017, you could also deduct your private mortgage insurance (PMI). However, as of December 31, 2017, you can no longer deduct mortgage insurance premiums.

Does my home qualify for the mortgage interest deduction?

You can only claim the mortgage interest tax deduction if your mortgage is for a qualified home, as defined by the IRS. As long as they qualify, you can write off mortgage interest on both your main home and a second home, as long as each home secures the mortgage debt.

The IRS considers a home to be any residential living space — including houses, apartments, condos, mobile homes, and houseboats — that has “sleeping, cooking, and toilet facilities.”

Main home

This is where you live most of the time. It counts as a qualified home.

Second home

Only one second home may be used to claim the deduction. However, how you use the home will determine whether you can claim interest on its mortgage.

  • If you don’t rent out the second home, then it counts as a qualified home even if you don’t live there during the year.
  • If you do rent out the second home, it counts as a qualified home only if you lived there for the longer of either 14 days or 10% of the number of days it was rented out during the year

Non-residential sections of your home

If any part of your home is not used for residential purposes, like a home office, you can only deduct the part of the mortgage interest proportional to the residential area.

Claiming a home you can’t live in

If you can’t live in your home for certain reasons, but you keep paying your mortgage on it, then you may be eligible to claim the mortgage interest tax deduction. Those reasons include:

  • Your home is under construction, but only if you move into it as your main or second home when construction is complete. The deduction applies to interest paid for a period of 24 months starting “on or after the day construction begins.”

  • Your home was destroyed by a natural hazard, such as a fire, tornado, or earthquake. Although you may still owe on the mortgage — which is the perfect argument for homeowners insurance with comprehensive rebuilding coverage — you can keep deducting interest after you sell the land or opt to rebuild the home.

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Deducting interest from a HELOC or home equity loan

Equity is the current value of your home minus how much you have left on your mortgage. If your home is worth $300,000 and you’ve made $50,000 in payments against the mortgage principal, you have $50,000 in equity.

You can receive part of the equity as cash without selling your home, by using it as collateral for a home equity line of credit (HELOC) or a home equity loan. (Read more about the difference between HELOCs and home equity loans.)

Whether you take out a HELOC or a home equity loan, the interest may be deductible just like ordinary mortgage interest. As with mortgage interest, the HELOC or home equity loan debt must be secured by a qualified home —if you default on the HELOC or home equity loan, your home could go into foreclosure, meaning you could lose the home.

HELOC interest tax deduction

With a HELOC, you can spend the equity, pay it back, and spend it again, as often as you need to during the years-long draw period. You’ll be charged interest on the amount you withdraw.

If you use the HELOC as home acquisition debt — that is, for buying, building, or renovating your home — that interest will be tax-deductible.

Home equity loan tax deduction

With a home equity loan, which is often referred to as a “second mortgage,” you receive a lump-sum payment based on your equity that will need to be paid back over the life of the loan.

As with HELOCs, home equity loan interest is tax-deductible only if it’s used for buying, building, or renovating your home.

Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.

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