Just wondering “can mortgage interest be deducted?” Let’s find out!
When it comes to taxes, it’s important to take advantage of all the deductions available to you. One deduction that many homeowners are curious about is the ability to deduct mortgage interest from their taxable income. While this deduction can be a great way to reduce your tax liability, it’s important to understand the rules and limitations associated with it.
Before we get to “can mortgage interest be deducted?” Let’s first talk about what a mortgage is first.
What is the mortgage interest?
Mortgage interest is the interest paid on a loan used to purchase or improve a home. This can include a mortgage on your primary residence, a second home, or a rental property. The interest paid is typically included in your monthly mortgage payment.
Now, to the question at hand: can mortgage interest be deducted?
How does mortgage interest deduction work
Still asking “can Mortgage interest be deducted and how does it work?” deduction is a tax benefit that allows homeowners to deduct the interest paid on their mortgage from their taxable income. Here’s how it works:
- Eligibility: To qualify for the mortgage interest deduction, you must be a homeowner who itemizes their deductions on their tax return. This means that you must be able to prove that your total itemized deductions exceed the standard deduction for your filing status.
- Calculation: To calculate your mortgage interest deduction, you’ll need to determine the total amount of mortgage interest you paid during the tax year. This includes interest on both your primary residence and any second homes or investment properties you own. You can find this information on Form 1098, which your lender should send you at the beginning of the year.
- Limits: There are limits to how much mortgage interest you can deduct. Currently, you can only deduct interest on up to $750,000 of mortgage debt if you bought your home after December 15, 2017. If you bought your home before that date, you can deduct interest on up to $1 million of mortgage debt.
- Other requirements: In addition to meeting the eligibility requirements and the limits on deductible mortgage interest, there are a few other requirements you must meet to claim the deduction. For example, the mortgage must be secured by your home, and you must have a legal obligation to make the payments.
- Claiming the deduction: To claim the mortgage interest deduction, you’ll need to itemize your deductions on Schedule A of your tax return. You’ll enter the amount of mortgage interest you paid on line 8b.
Can mortgage interest be deducted?
The answer is yes, but there are limitations. The IRS allows homeowners to deduct the interest paid on up to $750,000 of mortgage debt for homes purchased after December 15, 2017. For homes purchased before that date, the limit is $1 million. It’s important to note that this limit applies to the total amount of mortgage debt, not just the interest paid.
In addition to the limit on the amount of mortgage debt, there are also other rules and requirements to be aware of. For example, in order to claim the mortgage interest deduction, you must itemize your deductions on your tax return. This means you’ll need to forgo taking the standard deduction and instead list out all of your eligible expenses, including mortgage interest.
It’s also important to note that there are some situations where you may not be able to claim the mortgage interest deduction. For example, if you take out a home equity loan and use the funds for non-home-related expenses, the interest on that loan may not be deductible.
In summary, the ability to deduct mortgage interest can be a valuable tax benefit for homeowners, but it’s important to understand the rules and limitations associated with it. If you have questions about whether you qualify for the deduction or how to properly claim it, it’s always a good idea to consult with a tax professional. (You might also be interested in knowing how to get loan forgiveness.)
What’s not deductible
- Homeowners insurance.
- Extra principal payments you make on your mortgage.
- Title insurance.
- Settlement costs (most of the time).
- Deposits, down payments, or earnest money that you forfeited.
- Interest accrued on a reverse mortgage.
- Mortgage insurance premiums.
How to claim the mortgage interest deduction
You’ll need to take the following steps.
1. Look in your mailbox for Form 1098.
In January or early February, your mortgage lender will send you Form 1098 which outlines the total amount you paid in mortgage interest and points over the tax year. This form is also sent to the IRS, which cross-checks the information you report on your tax return.
You will receive form 1098 from your lender if you paid $600 or more in mortgage interest (including points) to them throughout the year. Additionally, you may be able to obtain year-to-date mortgage interest details from your lender’s monthly bank statements.
2. Keep good records.
Fortunately, in the following scenarios, you might be able to claim a deduction for mortgage interest, subject to certain conditions:
- If you used a part of your house as a home office, you might need to complete a Schedule C and claim additional deductions.
- As a co-op apartment owner, your tax situation may be different from other homeowners.
- If you rented out a portion of your home, it could impact your tax liability.
- If your home was a timeshare, your tax situation might be unique, and you may want to consult with a tax professional.
- If a portion of your house was under construction during the year, it could affect the tax treatment of your home-related expenses.
- If you used a part of your mortgage proceeds for non-housing purposes, it could affect your tax deductions and liabilities.
- If your home was destroyed during the year, it may impact your tax situation, and you may want to consult with a tax professional.
- If you were divorced or separated and you or your ex-partner has to pay the mortgage on a home you both own, the interest on the mortgage may be considered alimony.
- If you and someone other than your spouse were responsible for and paid mortgage interest on your house, it could impact your tax situation.
Unfortunately, the rules regarding this matter are quite complex. For more information, you can refer to IRS Publication 936 or seek the guidance of a qualified tax professional. It is crucial to maintain records of the square footage involved and accurately attribute income and expenses to specific areas of the house.
3. Itemize your taxes.
If you choose to claim the mortgage interest deduction on Schedule A of Form 1040, it would require you to itemize your deductions instead of taking the standard deduction when filing your taxes.
This might require additional time for tax preparation, but if your itemized deductions exceed your standard deduction, it would be advisable to itemize and save money. On the other hand, if your standard deduction is more than your itemized deductions (including mortgage interest), it would be more efficient to take the standard deduction and save time.
Using Schedule A, you can calculate your deduction, and your tax software can guide you through the process.
4. See if you qualify for special deduction rules.
In case you received assistance from a state housing finance agency program such as the “Hardest Hit Fund” or the Emergency Homeowners’ Loan Program (administered by the state or the Department of Housing and Urban Development), you may be eligible to deduct all mortgage payments made during the year.
Rounding Up – Can mortgage interest be deducted?
Still asking the question “Can mortgage interest be deducted?” Yes, mortgage interest can generally be deducted from your federal income taxes, subject to certain limitations and conditions. However, the specific rules and requirements can be complex and vary depending on your situation.
It is advisable to seek professional tax advice and keep accurate records of your mortgage interest payments and other relevant expenses to maximize your tax benefits.