When you buy a home or refinance a mortgage, you’ll have access to a tax perk known as the mortgage interest deduction. This allows you to subtract the interest you pay on your mortgage balance each year (up to certain limits), which can reduce your overall tax burden.
Understanding how the mortgage interest tax deduction works and federal tax rules will help you better manage your tax bills as a homeowner.
What is a mortgage interest deduction and how does it work?
The mortgage interest deduction is a tax break for homeowners who itemize their federal tax returns. It allows you to subtract the interest (not the principal balance) paid on your mortgage each year, but only if the loan was used to purchase, build, or significantly renovate your home.
As a result, you’ll lower the overall taxes you owe to Uncle Sam.
The mortgage interest tax deduction applies to interest paid on combined mortgage debt for a primary and second home. Here are the IRS limits, found in Publication 936, to qualify for the mortgage interest deduction:
- Up to $750,000 in total mortgage debt for married couples filing jointly ($375,000 if single or married and filing separately) for mortgages taken out after Dec. 15, 2017.
- Up to $1 million in total mortgage debt for married couples filing jointly (or $500,000 if single or married and filing separately) for mortgages taken out after Oct. 13, 1987, and before Dec. 16, 2017.
- No limit on mortgages taken out on or before Oct. 13, 1987, as this is considered “grandfathered debt” and you can fully deduct all mortgage interest paid.
Additionally, you can deduct mortgage interest paid on a second mortgage, such as a home equity loan or line of credit, or a cash-out refinance if the funds go toward buying, building, or substantially improving your home.
How to calculate a mortgage interest tax deduction
To calculate your mortgage interest deduction amount, divide the maximum mortgage debt limit by your outstanding mortgage balance, then multiply the result by the total mortgage interest paid.
Which mortgage costs qualify for a deduction?
In order to file your taxes correctly and get a tax deduction from your mortgage, it’s important to know which mortgage costs qualify for the deduction. Here’s a look at what loan fees and special situations count toward this tax break:
- Mortgage interest on primary and second homes: This is the fee that your lender charges as a cost of borrowing the principal loan amount. Mortgage interest is fully deductible, up to the limits mentioned earlier, for primary and second homes that secure the loan, but not rental properties.
- Mortgage points on primary and second homes: This fee is a type of prepaid interest that enables you to buy down your interest rate upfront. A point is equal to 1% of the loan amount. You can deduct mortgage points in the year you paid them or proportionally over the life of your loan.
- Late payment charge on your mortgage payment: You can deduct this fee as mortgage interest if it wasn’t for a specific loan service.
- Mortgage prepayment penalty: A lender sometimes charges this fee if you pay your mortgage off early. However, you can deduct this penalty as mortgage interest if it wasn’t for loan services.
- Mortgage interest paid during a home sale: You can deduct mortgage interest within the IRS limits paid up to (but not including) the home sale date.
- Mortgage interest paid by participating in assistance programs: If you received monetary assistance through the Hardest Hit Fund or Emergency Homeowners’ Loan programs, you can deduct the interest you paid. Just keep in mind that there are limits to the expenses you deduct. If the program you’re participating in paid a qualifying mortgage expense and you paid it back, you can deduct whatever you paid, up to a certain amount.
Which mortgage costs don’t qualify for a deduction?
Can you write off mortgage interest for all mortgage costs? The short answer is no.
Here’s a look at the mortgage expenses that don’t qualify:
- Mortgage interest on rental properties: You cannot deduct the interest paid on a rental property, because it’s not being used as a primary residence.
- Mortgage interest on loans above fair market value (FMV): If your loan amount is higher than the fair market value of your property, you may not qualify for a federal deduction.
- Mortgage insurance premiums: Mortgage insurance fees, including private mortgage insurance, Federal Housing Administration mortgage insurance premiums, U.S. Department of Agriculture guarantee fees, and Department of Veterans Affairs funding fees, are no longer deductible as of 2022.
- Mortgage closing costs: Other third-party loan fees and closing costs, such as title insurance/search fees, recording fees, legal fees, credit check charges, and agent commissions, are not interest and, therefore, are not deductible.
- Property taxes: Although you can’t deduct property taxes as mortgage interest, you can deduct them when you itemize under the state and local income tax (SALT) deduction. The SALT deduction is capped at $10,000 for property taxes and state income or sales taxes (but not both).
- Homeowners insurance premiums: This annual cost is paid directly to your insurer and doesn’t qualify for a tax deduction.
- Down payments, deposits, or earnest money: These out-of-pocket expenses to purchase a home are not interest payments and are also not tax-deductible.
Remember that if you take out a second mortgage or cash-out refinance loan and use the money for any purpose other than adding value to your home, you won’t be able to deduct mortgage interest either.
How to apply for a mortgage interest deduction
To be eligible for the mortgage interest deduction, you must itemize your federal taxes instead of taking the standard deduction; you can’t do both. To itemize your taxes, you must file Form 1040 (or 1040-SR) and itemize deductions from your mortgage interest statement on Schedule A.
The standard deduction for 2023 (which you’ll file taxes for in 2024) is $27,700 for married couples filing jointly, $13,850 for single taxpayers and married couples filing separately, and $20,800 for heads of households. While a standard deduction is a set dollar amount based on your filing status, an itemized deduction includes several different expenses, assuming they are eligible. If your itemized deductions add up to more than the standard deduction, it might make more sense for you to choose that option, but it will all depend on your unique financial circumstances.
Even with the mortgage interest deduction factored in, the standard deduction usually works in most filers’ favor, rather than itemizing. Homeowners with higher incomes — especially those who make $200,000 or more — tend to benefit the most from itemizing their tax returns, according to a report from the Tax Foundation.
If you paid more than $600 in mortgage interest within a year, your lender will send you a mortgage interest statement (Form 1098) by Jan. 31 for the previous tax year. The statement will list all the mortgage interest and points you paid, as well as indicate if you bought a home that year and how many points you paid, if any. You’ll use the information in this statement to file Form 1040.
Mortgage interest deduction FAQ
What is the mortgage interest deduction limit?
If you and your spouse, if married and filing jointly, took out a mortgage after Dec. 15, 2017, the mortgage interest deduction limit is up to the first $750,000 in mortgage debt (or $375,000 if single/married and filing separately). This IRS limit applies to any mortgage debt that’s used to “buy, build or substantially improve” your home.
How do I qualify for a mortgage interest deduction?
To qualify for a mortgage interest tax deduction, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A. Additionally, the mortgage must be on a qualified primary residence or second home that you own and hold the title to. While you can deduct the interest paid on a second mortgage or a cash-out refinance, the funds must be used to “buy, build, or substantially improve” the property to be eligible.
Is mortgage interest 100% tax deductible?
Yes, mortgage interest is fully deductible up to certain IRS limits, as long as the loan is on your primary or second home (and not a rental property). Unlike primary or secondary homes, rental properties (also referred to as investment properties) are purchased with the intent of making money from the tenants’ payments or from flipping the property after making some improvements. The amount that you are able to deduct from your property depends on the FMV. The FMV is essentially the cost of your property if it were sold on the open market.
Is homeowners insurance tax deductible?
Homeowners insurance is not tax deductible on your primary home. However, you may be able to deduct homeowners insurance premiums you pay on a rental property.
