Mortgage Interest Deduction

The mortgage interest deduction is a tax break that allows households to deduct a limited amount of their home mortgage interest from their federal income taxes. It only applies to mortgages used to buy, build or substantially improve a primary residence. A household must itemize deductions on their tax return to claim the mortgage interest deduction instead of claiming the standard deduction. If a household chooses to itemize, the mortgage interest deduction will be reported on Schedule A: Itemized Deductions. Mortgage interest is generally included among other itemized deductions, including property tax and medical expenses.

Interest is a fee charged by lenders for borrowing money to buy a house, and it’s calculated as a percentage of the principal or the amount borrowed. Borrowers can choose between fixed or variable rates, with the latter typically offering higher yields. The interest you pay on your mortgage is tax-deductible if you itemize deductions and meet certain rules. The perk isn’t as attractive as it once was, but it still makes sense for many homeowners. If you have a complex situation regarding the mortgage interest deduction, consult IRS Publication 936 or a tax professional for guidance.

Who is Eligible for Mortgage Interest Deduction?

To qualify for the mortgage interest deduction, you must use your home as collateral for the loan, and the debt must be used to buy, build or substantially improve your qualified home (see 163(h)). Also, the home must be your main residence or second home. A “qualified home” includes a house, condominium, cooperative, mobile home, apartment, house trailer, boat, or similar property with sleeping, cooking, and toilet facilities. You can get information about the mortgage interest you paid during the year from your lender on Form 1098, Mortgage Interest Statement. The forms show the mortgage interest and deductible points you paid during the year. Prepaid interest is generally figured and deducted ratably over the life of the mortgage.

Your lender lists the total amount of mortgage interest you paid in box 1 of your 1098. Then, you subtract any prepaid interest (see Prepaid Interest earlier) to determine the amount of interest you paid in the year. You may be able to deduct points you pay when you refinance your mortgage, but only if your loan proceeds are used to buy, build or substantially improve your home. You cannot deduct mortgage points if the proceeds are used to pay credit card debt or invest in tax-exempt securities.