Understanding the Mortgage Interest Deduction

The Mortgage Interest Tax Deduction

The Mortgage Interest Deduction allows homeowners to reduce their taxable income by the amount of interest paid on a qualified residence loan. The law regarding the Mortgage Interest Deduction has been revised by the Tax Cuts and Jobs Act, and the changes took effect beginning with returns filed in 2019. That means that – whether you have claimed the deduction before, or you are claiming it for the first time – there are important new details that will potentially affect how much you can write off this year.

A Qualified Residence Loan

According to the IRS, a “qualified residence loan” must be used to purchase, construct, or make substantial improvements to a primary or secondary residence. The loan must also be secured by the home and should not exceed the value of the home. 

Beginning in tax year 2018, single filers and couples filing jointly can deduct the interest on up to $750,000 of qualified residence loans. Couples filing separately can deduct interest on up to $375,000 of qualified debt.  

The amount decreased from $1 million ($500,000 for couples filing separately) under the Tax Cuts and Jobs Act. But if you secured your loan before Dec. 15, 2017, the previous limits still apply to your deduction.  

Deducting Home Equity Interest

Prior to the Tax Cuts and Jobs Act, if you took out a home equity loan up to $100,000, you could deduct the interest from your taxable income. It did not matter how you used the loan. When the tax laws changed, that provision was eliminated. Now, home equity loans are a specific example of a qualified residence loan, and the rule for deducting the interest on them says that the loan must be used to purchase, construct, or make substantial improvements to your primary or secondary home.  

So, whether you can deduct your home equity interest or not actually depends on how you use the money. If you use your home equity loan to make improvements to your residence, the interest is still deductible. But if you use it to cover personal expenses, like credit card debt or student loans, you can’t deduct the interest. 

Who can deduct mortgage interest? 

The interest you pay on a mortgage or a home equity line of credit for your primary residence or a second home can be deducted from your income when you: 

  • File taxes on Form 1040 and itemize your deductions. 
  • Have secured debt on a qualified home in which you have an ownership interest. 

How the Mortgage Interest Deduction Works

Say you take out a $250,000 loan to purchase a $300,000 house. You use the house to secure the loan. The same year, you take out a $100,000 loan to fix up your summer cabin, valued at $150,000. You use the cabin to secure that loan. The combined total for your loans is less than the $750,000 limit. Under the new law, you can deduct the total interest you pay for these loans from your taxable income. 

Mortgage Interest Deduction for Multiple Owners

When multiple people buy a home together, each owner can deduct the amount of interest they pay, but only if they itemize their deductions. Lenders typically send out a mortgage interest statement at the end of the tax year to indicate the total interest paid on the mortgage. Taxpayers are responsible for deducting the correct amount of interest they paid, regardless of whose name or Social Security number is listed on the mortgage interest statement received, as long as they are a legal owner of the property. 

Deducting Interest for Someone Else’s Mortgage

If you help make mortgage payments for a child or friend while they are unemployed, you cannot claim the mortgage interest deduction for someone else’s debt unless you are a legal owner of the property. 

The information in this article is up to date through tax year 2020 (taxes filed 2021). 

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