Mortgage Interest Deductions 101: What You Should Know

In This Article

Do you enjoy filing your taxes? Of course you don’t. But there’s a silver lining. 

Doing your taxes can be fun (or at least tolerable) when you understand how to make the best of your circumstances. Savvy investors know the power of taking advantage of every last deduction—within the limits of the law. 

This leads to an important question: How much mortgage interest can I deduct on my taxes?

Understanding the Mortgage Interest Deduction

In simple terms, the mortgage interest deduction is for interest paid on mortgage debt. 

The mortgage interest deduction was designed to promote homeownership by allowing property owners to take a significant deduction. 

This itemized deduction allows a homeowner to deduct the interest they pay on a loan against their taxable income. 

You can deduct interest for:

• Primary mortgages
• Secondary mortgages
• Home equity lines of credit (HELOCs)
• Home equity loans

The mortgage interest deduction can also apply if you pay interest on a condo, cooperative, mobile home, boat, or RV used as a residence.

Note: If you take the standard deduction, you cannot take advantage of this tax break.

How Much Mortgage Interest Can You Deduct on Your Taxes?

The amount of interest you can deduct depends on two factors:

• IRS eligibility requirements
• The amount of interest you paid during the tax year

Let’s look at the eligibility criteria as outlined by the IRS:

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before Dec. 16, 2017.

With this potential for gray area, it’s important to consult with your tax professional before taking this deduction.

Calculating Your Mortgage Interest Deduction

While your tax professional can accurately guide you, there may be a point when you need to calculate your mortgage interest deduction.

Here are the steps you should take:

Identify the mortgage amount eligible for interest deduction

As noted, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). This limit applies to debt incurred to buy, build, or substantially improve the taxpayer’s home.

Gather your mortgage interest statements (Form 1098)

Your lender will provide this form annually. This outlines the amount of interest you’ve paid over the tax year.

Calculate the deductible interest

Use the information from Form 1098 to determine your deductible interest. If your mortgage exceeds the eligible amount, you’ll need to calculate the deductible portion of your interest. 

For instance, if you have a $900,000 mortgage, only 83.33% ($750,000/$900,000) of your interest payments are deductible.

Now, let’s look at an example scenario: Suppose you have a $500,000 mortgage at a 4% annual interest rate. Over the year, you pay $20,000 in interest. Since your mortgage is below the $750,000 limit, the entire $20,000 is deductible on your tax return.

Records Needed to Take the Mortgage Interest Tax Deduction

With any tax-related item, you want to keep great records to support your claims. 

Like Rich Dad Advisor Tom Wheelwright always says, “If you want to change your tax, you have to change your facts.”

When taking this deduction, it’s no different. Make sure to keep the following records on hand to document you are entitled to this deduction:

• Copies of all Form 1098: These are mortgage interest statements that your lender sends you to document how much mortgage interest you have paid throughout the year. You also want to document any deductible points and mortgage insurance premiums you paid as well.
• Copies of all HUD closing statements from a purchase or refinance that show points that you paid (if any).
• Information about the person who sold you the property if you purchased your home directly or used seller financing. This includes their name, address, and Social Security number. If you pay interest (and points) to them, you will want to document that as well.
• Past federal tax returns so you can track the eligible interest and points you are deducting over the life of the mortgage.

Since you may be deducting mortgage points over 30 years, keep these files on hand for the entire time you have the property.

Maximizing Your Deductions: Tips and Strategies

Maximizing deductions is a key strategy for real estate investors, particularly when it comes to planning mortgage payments and managing refinancing and home equity loans. Without advanced planning, you could make mistakes that cost you thousands of dollars in the long run.

Here are some tips and strategies that can work in your favor:

Accelerate or delay mortgage payments

Consider the timing of your mortgage payments to maximize deductions. Prepaying your January mortgage payment in December, for example, can increase your deductible interest for the current tax year. 

Conversely, delaying this payment until January of the following year might benefit you if you anticipate being in a higher tax bracket.

Refinance smartly

When refinancing, ensure the new loan doesn’t exceed the amount of the original mortgage to stay within MID eligibility. 

Also, remember that points paid to refinance can be deducted over the loan’s life, offering an additional deduction.

Use home equity loans

Interest on home equity loans is deductible when used to buy, build, or substantially improve the taxpayer’s home that secures the loan. 

Strategically using home equity loan funds for qualifying improvements can maximize your deductions.

Investment property considerations

For investment properties, ensure your loan interest is categorized correctly as an investment expense, as it can be fully deductible against rental income.

Beyond the Basics

Beyond the basic mortgage interest deduction, other aspects of your mortgage payments can potentially lower your tax bill. Understanding the deductibility of points, mortgage insurance premiums, and late payment fees can make for good additions to your tax strategy. 

Here’s a look at each:

1. Points: Points paid to obtain a home mortgage can be deductible as mortgage interest if they are paid directly to the lender as part of a main home purchase. This deduction can be taken in the year paid or amortized over the life of the loan, depending on the loan’s specifics.
2. Mortgage insurance premiums: For some taxpayers, premiums paid for private mortgage insurance (PMI) or government mortgage insurance can be treated as mortgage interest and deducted. The ability to deduct phases out at higher income levels.
3. Late payment fees: While something you want to avoid, late payment fees on a mortgage can also be deductible as mortgage interest.

Professional Advice and Resources

The most important thing to remember is that you always want to consult a tax professional and/or tax advisor when making important financial decisions. This is especially true when it comes to your taxes. 

Tip: Use our Tax & Financial Services Finder to locate and hire the right professional for your situation.

Here are some additional resources from the IRS:

• Publication 936: Home Mortgage Interest Deduction
• Publication 530: Tax Information for Homeowners
• Tax Topic 504: Home Mortgage Points

Final Thoughts

Now that you know how much mortgage interest you can deduct on your taxes, you’re in a better position to save yourself money as a homeowner and/or investor. 

It’s worth noting one last time that you should always consult with a tax professional. You don’t want to run afoul of the IRS.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.