Mortgage interest can be tax deductible, but there are several requirements that you need to meet.
Mortgage Interest Deduction Requirements
There are four main requirements you usually need to meet to claim the mortgage interest tax deduction. There are some other things that can come into play in unusual situations, so it never hurts to ask your tax advisor.
The loan generally needs to be to buy, build, or substantially improve your home. That means a home equity loan for debt consolidation purposes will usually not have deductible interest.
Reverse mortgage interest also usually won’t be deductible, since those loans are usually to pay other living expenses.
Buy and build mean exactly what they sound like. You’re either buying an existing home from someone else or hiring a builder.
Substantial improvement means adds to the value of your home, prolongs your home’s useful life, or adapts your home to new uses.
Repairs and maintenance are usually not substantial improvements. For example, getting new kitchen appliances usually won’t qualify for tax benefits.* However, if your home needs major electrical or plumbing work to be able to add modern kitchen appliances, that will probably be a substantial improvement.
*There are sometimes temporary state or federal tax credits related to installing energy-efficient appliances. Ask your tax advisor about current options.
You can normally deduct interest on the first $750,000 of your loan ($375,000 if married filing separately).
The good news if you have a bigger mortgage, is you still get a partial deduction. For example, if you have a $1 million mortgage, you still get to deduct the first $750,000.
If you have multiple mortgages, you get a combined $750,000 limit on all of your loans.
If you have mortgage debt from before 2017, you may qualify for a $1 million limit or higher. Ask your tax advisor what your limits are.
Secured debt means that your loan must be secured by your home. That’s usually the case for most mortgages.
However, if you took out an unsecured personal loan (such as for renovations), you likely won’t be able to deduct mortgage interest. You can also lose your deduction if you refinance a qualifying mortgage into a non-qualifying loan.
Use of Your Home
To claim the personal mortgage interest deduction, you also need to have a qualifying use of your home. This usually includes the following.
- Your main home where you live most of the time.
- A second home you don’t rent out.
- A second home that you rent out but use for the longer of 14 days per year or 10% of the number of days you had it rented.
If you have more than one second home, you usually need to pick one to be your second home each year. You may be able to change during the year in some situations such as selling your second home or changing how you use your second home.
If you have a rental property that doesn’t qualify for the personal mortgage interest deduction, you may still qualify for landlord tax deductions.
How to Claim the Mortgage Interest Deduction
The mortgage interest deduction is an itemized deduction.
If you have a smaller mortgage or have almost paid off your mortgage, the standard deduction could be bigger than your potential mortgage interest deduction. However, you may also have other possible itemized deductions such as state and local taxes or medical expenses.
You should get a Form 1098 in January showing how much you paid in mortgage interest during the previous year.
Getting a Form 1098 doesn’t mean your interest is automatically deductible. You still have to check the other IRS rules discussed above. Similarly, if you didn’t get a Form 1098 for some reason, you can still qualify for a deduction.
Your itemized deductions go on Schedule A of your tax return. Most tax filing software will ask about potential itemized deductions and then automatically calculate if you save more by taking the standard deduction or itemizing.