As a homeowner, you can get mortgage interest deduction for the interest paid towards your primary or second home mortgages from your personal income, subject to certain conditions and qualifications. In addition to interest deduction, mortgage points paid towards the loan closing, PMI, insurance premiums and other relevant costs may also be eligible for deduction.
In order to qualify for mortgage tax deduction, the following two conditions must be satisfied.
- You must itemize all your deductions on schedule A (Form 1040). Those who opt to take a standard deduction cannot claim tax deduction for mortgage interest paid on their eligible home mortgages.
- You should have an ownership interest in the residential property used for securing the mortgage debt.
What Qualifies as a Home Under IRS Home Interest Deduction Guidelines?
You should be able to claim a deduction for mortgage interest in the majority of the cases. The actual amount that you may be entitled to deduct depends on the date on which the mortgage originates, the loan amount of the actual mortgage, and the manner in which the proceeds from a mortgage have been used.
Eligible Mortgage Types for Interest Deduction
Any amount that you pay towards the interest portion of a loan secured by your main home or second home is considered to be mortgage interest. The common loan types eligible for deduction are: mortgage to purchase a home, second mortgage, home equity loan or a line of credit.
If the residential property (occupied as primary residence or used as a second home) that you own is not used as collateral to secure a debt, then the interest paid on such loans do not qualify for tax deduction as such loans are treated as personal loans.
If the details of your mortgage fit into to one or more of the following three categories during any tax year, you’ll be able to deduct the entire mortgage interest amount.
The three categories under which the entire home mortgage interest can be deducted are:
- If the closing date of your mortgage was on or before October 13, 1987. The loans that fall under this group are called “Grandfathered Debt”.
- For any mortgages on your main home or second home that were taken out for the purpose of purchasing, building or improvement after October 13, 1987, the entire mortgage interest on outstanding debt up to an amount of $1 million can be claimed as deduction. If married and filing separately, the allowed mortgage debt amount is $500,000 for each spouse.
- The interest paid on total home equity debt (Cash-out refinance) up to $100,000 is deductible as mortgage interest. If you are married and filing the tax returns separately, the home equity debt on which interest can be deducted is $50,000. This interest deduction provision applies to home equity mortgage loans on eligible primary or secondary residential dwellings that closed after October 13, 1987.
There are no IRS conditions regarding the specific purposes for which such home equity funds should be used. Even if you used the funds for any personal reason, the total interest up to the allowed limit of $100,000 is deductible from your personal income. At the time of the loan closing, the combined amounts of acquisition financing and home equity funds must be less than or equal to the property’s market value.
If you do not meet the criteria outlined above, then the actual deduction you can claim as mortgage interest shall be limited.
Mortgage interest deduction can be claimed by the borrowers who are obligated to make the repayments on the loan secured by their primary home or second home. Only those who have actually signed on the mortgage documents can deduct the interest payments from their income.
If you are married, both you and your wife are considered to be the primary borrowers, provided you both signed the mortgage loan documentation.
IRS Mortgage Interest Deduction Limits
IRS restricts the loan amount on which you can claim interest deduction. The maximum loan amount allowed for both primary and second home is $1,000,000, if filing jointly. If you are married but filing separately, the deduction limit is $500,000. This applies to any mortgages that were used for the purchase, construction, or improvement of your first home and second home. Even if you refinanced and cashed-out some of your equity, you can still claim interest deduction for any home equity debt up to $100,000 ($50,000 if married and filing separately).
If you happen to face a special situation, read the following to understand how it affects your interest deduction for tax purposes.
- If you own a second home and rent it out, and wish to get a deduction for the interest you are paying on its mortgage, you need to live a certain number of days in the home in order to qualify. If you happen to rent out your second home, you are required to occupy it for at least the higher of 10% of the days you rented out at the fair market prices, or 14 days. If your second home occupancy falls below the IRS mandated minimum number of days, it will be considered as a rental property. In such a case, the mortgage interest deduction rules do not apply.
- If you happen to own more than two residential properties, you have the option of choosing a different second home for each tax year to claim deductions for interest payments.
Have questions about the mortgage interest deduction and how it applies to your situation? Be sure to speak with your tax and/or legal professional for answers. This article is intended to be for informational purposes and not intended to be tax or legal advice.
You may also want to speak with a loan officer about your situation – and the easiest way to get in touch with a mortgage professional is to start here.