Mortgage interest deduction: What it is and what qualifies

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.

Is mortgage interest tax-deductible?

In a nutshell — yes. But let’s be clear. We’re talking about the interest portion of your mortgage payment that you make each month. The deduction doesn’t apply to the mortgage principal, nor the 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 get an estimate of the type of savings you can expect when you file.

What is the mortgage interest deduction?

The mortgage interest deduction is a tax incentive for people who own homes as it allows them to write off some of the interest charged by their home loan. The deduction allows you to reduce 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.

How much mortgage interest can be deducted?

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.

What qualifies as mortgage interest?

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:

• Any interest on your home loan – The collateralized property must include sleeping, cooking and eating facilities and can be a home, condo, co-op, mobile home, boat or recreational vehicle.
• Interest on a second home you rent out – If you do lease the property for a certain period of the year, you’ll need to meet certain guidelines (specifically, using it for your own use either more than 14 days or more than 10 percent of the time it’s rented out, whichever is longer) to deduct the interest. Be sure to read up on other tax deductions for a rental property.
• Late payment fees – You can likely deduct the extra fee you’re charged for being late on your mortgage payments.
• Prepayment penalties – If you’re charged a penalty fee for paying off your mortgage early, you can deduct this amount.
• Points – If you paid points to lower your mortgage interest rate, you can deduct a portion of these that applies to the individual filing year.

What mortgage costs are not deductible?

There are some mortgage costs you may encounter that are not deductible with interest. These include:

• Interest on a mortgage for a third home (or fourth, fifth…)
• Any interest on a reverse mortgage until you actually pay it
• Mortgage insurance payments
• Homeowners insurance
• Appraisal fees
• Notary fees
• Closing costs or down payment money
• Extra payments made toward the principal

What types of home loans qualify for a mortgage interest deduction?

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.

If you have a reverse mortgage, you won’t be able to deduct any interest until you actually pay it. (Reverse mortgages accrue interest monthly, but often payment is deferred until the home is sold or permanently vacated — one of the attractions of these loans).

How to claim the mortgage interest deduction on your tax return

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:

Find out how much interest you paid

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, detailing the annual total amount of interest you paid in the previous year.  This form should arrive in late January or early February, and should also include information about other deductible costs, like points or fees.

Do the math

It’s possible that itemizing your deductions so that you can get the mortgage interest deduction doesn’t actually make sense for you. You’ll need to determine if itemizing all your deductions (your mortgage interest charges and any other eligible expenses)  will give you a larger total than the standard deduction would.

Claim the 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 the 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.

Special circumstances for the mortgage interest deduction

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.

• Home office complications – If you use a portion of your property for a home office, you’ll need to calculate the specific square footage used for living versus working. The “living” space is the only portion that qualifies for a mortgage interest deduction. (But the “working” space could qualify as a business expense deduction, if you’re self-employed.)
• Home under construction – If you’re building a home, you have a 24-month period that qualifies under mortgage interest deduction guidelines.
• Home sales – If you sold your home last year, you’re still allowed to deduct interest accrued on the loan up to — but not including — the date of the sale.

How long has mortgage interest been tax-deductible?

The mortgage interest deduction has been around for more than 100 years, but has changed over time. Here are some milestones in its history.

• 1894 and 1913: The mortgage interest deduction got its start alongside the first income taxes, which were implemented in 1894 and 1913. At the time, all interest payments were tax-deductible: Homeownership was much rarer than it is today.
• 1930s: The 1930s saw the formation of the Federal Housing Agency, which insures mortgages.
• 1960: The post-World War II GI Bill of Rights helped provide easy loans to veterans, which ballooned the homeownership rate to almost 62 percent by 1960.
• 1970s: Credit cards became more common, leading people to deduct huge amounts of interest on their taxes.
• 1986: Congress passed the Tax Reform Act, ending the deductibility of most kinds of interest. The big main exception: interest paid on mortgages and other home-related financing. (Second mortgages and home equity lines of credit mushroomed as a result.) The Act did place a $1 million cap on the loan principal whose interest was eligible for deductions.
• 2017: The Tax Credit and Jobs Act of 2017 wrought further changes. It reduced the maximum loan amount to $750,000. It also limited the deductibility of home equity loans/lines of credit interest. Previously, the purpose of the financing was irrelevant; now, the funds have to go towards the home being used as collateral: purchases, repairs or significant improvements.

It all brings us to today, where 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.

Mortgage interest deduction FAQ

• What other tax deductions are available for homeowners?

  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 probably score some tax perks there, too. And when you sell your house, you can likely claim some capital gains tax perks if it has been your primary residence.
  

• Is it worth claiming mortgage interest on taxes?

  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.
  

• Can I deduct mortgage interest if I pay it to a private individual instead of a financial institution?

  You can only deduct mortgage interest under set circumstances. These situations can include direct payment to a private individual instead of a financial institution, but it must be for something like building or improving a residence.
  

Additional reporting by Mallika Mitra