Home Mortgage Interest Deduction

The mortgage interest deduction lets homeowners who itemize their tax returns reduce taxable income by deducting interest paid on qualifying loans used to buy, build, or improve a home. Mortgage lenders report deductible interest each year on Form 1098.

How it works

• Deductible mortgage interest is claimed on Schedule A (Form 1040) for a primary or secondary residence. Interest on rental-property mortgages is reported on Schedule E.
• You must itemize deductions to claim mortgage interest. If your total itemized deductions are less than the standard deduction, you usually receive a greater tax benefit by taking the standard deduction.
• The mortgage must be secured debt (e.g., mortgage, deed of trust, or land contract).

What qualifies as mortgage interest

• Interest on mortgages used to buy, build, or substantially improve your primary or second home.
• Interest on certain home equity loans and lines of credit if proceeds are used to buy, build, or substantially improve the home.
• Interest on refinanced mortgages is deductible to the extent the proceeds are used for qualifying purposes.

Limits and legacy rules

Under the rules established by the Tax Cuts and Jobs Act (TCJA):
* Deductible interest is limited to interest on up to $750,000 of mortgage principal for married filing jointly ($375,000 for married filing separately) for qualifying new loans.
* For mortgages originated earlier, legacy rules may allow higher limits:
* Mortgages issued before Oct. 13, 1987: interest is fully deductible (no limit under legacy rule).
* Mortgages issued between Oct. 13, 1987 and Dec. 15, 2017: deductible interest generally limited to the first $1 million of mortgage debt ($500,000 if married filing separately).
* In some sale/contract timing situations (contracts executed by Dec. 15, 2017 with closings before Apr. 1, 2018), the $1 million limit may apply.
* Second-home mortgage interest can qualify, subject to the same limits.
* Co-owners can each deduct the share of interest that corresponds to their ownership interest.

Reporting

• Lenders report mortgage interest paid on Form 1098, which you use to prepare Schedule A (or Schedule E for rental properties).
• Keep records showing how refinance or home equity proceeds were used, if you claim interest on those loans.

When the deduction is beneficial — examples

Example 1 — Beneficial: A married couple in the 24% tax bracket paid $20,500 in mortgage interest. If their total itemized deductions (including interest) exceed the married standard deduction, itemizing yields a larger tax benefit than taking the standard deduction.

Example 2 — Not beneficial: A single taxpayer in the 24% bracket paid $9,700 in mortgage interest and has only $1,500 additional itemizable deductions (total $11,200). If the standard deduction for single filers is larger than $11,200, itemizing provides no benefit and the mortgage interest deduction is not claimed.

Common questions

• Can you deduct both mortgage interest and property taxes?
  Yes—if you itemize, you can deduct both, subject to limits applicable to each deduction.
• Can co-owners each deduct mortgage interest?
  Yes, each co-owner may deduct the portion of interest that corresponds to their ownership share, within the applicable limits.
• Is mortgage interest deductible after a refinance?
  Yes, if the refinanced loan is secured by your primary or secondary residence and the proceeds are used for qualifying purposes (for example, a capital home improvement).

Bottom line

The mortgage interest deduction can reduce taxable income for homeowners who itemize, but it is limited by loan-date rules and capped mortgage amounts under current law. Because the standard deduction was increased substantially under the TCJA, far fewer taxpayers itemize today, and many homeowners no longer benefit from this deduction. For decisions about whether to itemize or to claim mortgage interest, compare your total itemized deductions to the standard deduction and consult current IRS guidance or a tax professional for your specific situation.