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Kenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more.
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Buying a home has never been more expensive, but you might be able to take advantage of the mortgage interest deduction to lower your tax bill. Mortgage interest can be tax-deductible, but the IRS rules regarding the tax deductibility of mortgage interest have gotten very complicated. To help, here’s a guide to help you understand the ins and outs of deducting mortgage interest, and what you need to know for tax filing.
Yes. The interest portion of your mortgage payment is tax-deductible.
The deduction doesn’t apply to the mortgage principal, down payment or mortgage insurance premiums (after tax year 2021). Most buyer’s closing costs don’t count either, except for discount points (which you pay to reduce your interest rate).
Claiming mortgage interest on taxes also requires you to itemize your deductions. You can use Bankrate’s mortgage interest deduction calculator to estimate the type of savings you can expect when you file.
The mortgage interest deduction is a tax incentive for homeowners. It allows them to write off some of the interest charged by their home loan. The deduction reduces your taxable income by the amount of interest paid on the loan during the year, along with some other related expenses.
There are limits on the amount of interest you can deduct based on your tax filing status and when you took out your mortgage.
If the mortgage was taken out before Oct. 13, 1987, there is no cap or no upper limit.
If the home was purchased between Oct. 13, 1987 and Dec. 16, 2017, single and joint filers can deduct the mortgage interest paid on their first $1 million in mortgage debt ($500,000 if those married filing separately).
For mortgages taken out since Dec. 16, 2017, you can deduct only the interest on the first $750,000 if you are single or married filing jointly ($375,000 if you are married filing separately). Note that if you were in contract on or before Dec. 15, 2017, but the mortgage closed prior to April 1, 2018, your mortgage is considered to have been a December 2017 purchase, and you can hit that million-dollar loan mark when claiming mortgage interest on taxes.
Whatever the amount, bear in mind that it applies collectively to all your home-related debt. In other words, if you and your spouse have a $500,000 mortgage and a $100,000 home equity loan, taken out in 2018 and 2021, respectively, you have $600,000 in total debt and are $160,000 short of the $750,000 loan amount cap.
Example of mortgage interest deductionLet’s say that last year, you paid $26,000 in interest on your mortgage, which is about what you would pay if you were paying 2023’s median monthly interest payments. If your annual salary is $130,000, you may be eligible to deduct that mortgage interest, cutting your taxable income to $104,000.
The IRS’s general definition of “mortgage interest” is interest that accrues from any loan secured by your primary home or a second home. There are other costs and fees that can be included when claiming mortgage interest on taxes, too. Here’s a rundown:
There are some mortgage costs you may encounter that are not deductible with interest. These include:
You can qualify for a mortgage interest tax deduction on your main home or primary residence. The collateralized property must include sleeping, cooking and eating facilities and can be a home, condo, co-op, mobile home, boat or recreational vehicle.
You can deduct mortgage interest on your taxes for a second home, even if you rent or lease the home to a tenant. If you rent the property for a certain period of the year, you must meet guidelines to deduct the mortgage interest. For example, you must live there for more than 14 days or more than 10 percent of the time you’ve rented it, whichever is longer. Be sure to read up on other tax deductions for a rental property.
It’s pretty straightforward that deducting mortgage interest is an option with primary mortgages — whether they are a fixed rate or adjustable rate. But you might be wondering, “Can I deduct mortgage interest on my home equity loan or home equity line of credit (HELOC)?”
The answer: It depends. Mortgage interest is only deductible when the loan — even if it’s a second mortgage — is used to buy, build or substantially improve your home. So if you used your HELOC or home equity loan for a remodel, the interest should be deductible. But if you used it to pay off credit card debt or college tuition, you’re out of luck.
Generally, you claim the mortgage interest tax deduction in the year the interest was accrued. For some costs, such as mortgage points, you can stretch out the deduction over the life of the mortgage.
While almost all homeowners qualify for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal income tax return by filing a Schedule A with your Form 1040 or an equivalent form.
You’ll have to decide whether it’s better to deduct the mortgage interest by itemizing or taking the standard deduction. The standard deduction for tax year 2023 is $13,850 for single filers and $27,700 for married taxpayers filing jointly. For 2024, it’s $14,600 for single filers and $29,200 for married taxpayers filing jointly.
That means that the mortgage interest you paid, plus any other tax deductions you’re eligible for, would need to exceed those amounts for it to make sense to itemize.
To claim the mortgage interest deduction, follow these steps:
You don’t have to keep track of how much interest you paid during the year — your lender or servicer should take care of that for you. That means you have to watch for communications from the company early in the year as it will send Form 1098, which details the annual total amount of interest you paid in the previous year. This form should arrive in late January or early February and includes information about other deductible costs, like points or fees.
It’s possible that itemizing your deductions to get the mortgage interest deduction doesn’t make sense for you. You’ll need to determine if itemizing all your deductions (mortgage interest charges and any other eligible expenses) will give you a larger total than the standard deduction.
Once you’ve decided that itemizing your deductions and claiming your mortgage interest payment makes sense, you’ll have to do the paperwork come tax time. Give your Form 1098 to your tax professional, or complete Schedule A on Form 1040 independently. All reported mortgage interest will be entered on line 8a, any unreported will go on line 8b and mortgage insurance premiums will go on line 8d.
When you review the IRS guide for deducting mortgage interest, you’ll notice some exceptions in certain situations. Below is a partial list of those special considerations. If you have a unique circumstance, review the most up-to-date IRS Publication 936 or ask a tax professional for guidance.
The mortgage interest deduction has existed for more than 100 years but has changed over time. Here are some milestones in its history:
Today, mortgage interest is tax deductible — if you itemize your deductions — and serves as an extra incentive to homebuyers during a time of high interest rates.
You can likely claim a tax deduction for what you paid in property taxes. If you have a home office from which you operate a business, you can usually score some tax perks there, too. When you sell your house, you can often claim some capital gains tax perks if it has been your primary residence.
Claiming mortgage interest can save you money in taxes, even if you are limited in how much interest you can claim. However, this break typically only benefits people with large, expensive loans or a lot of other deductions. Keep an eye on how much interest you pay and compare it to the standard deduction. If it helps put you in a position to itemize, it might be a good idea to go for it. Just bear in mind that the process can be drawn out and require a lot of effort on your part, including hiring a tax professional to consult on your taxes.
Arrow Right Contributor, Personal Finance
Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.
