Mortgage Tax Deductions

couple looking at tablet

For some folks, a new year means a fresh start, new resolutions, or a better outlook on life. But for pretty much all of us, it means the start of everyone’s least favorite season of the year: tax season.

It’s not so much that tax season is “bad,” as many people do end up with a decent refund. It’s more that the preparation process can get complicated, and we’d specifically like to ensure clarity around what Mortgage deductions a homeowner (or mortgage holder) could qualify for – because it’s important that people don’t pay more in taxes than what they’re legally required to.

The short of it is this: when it comes to mortgage tax deductions, mortgage interest is the only deduction you can claim. But the details can get a little complicated, so we’re breaking it down for you with the following information. Please note that we also encourage you to talk to an accountant or tax preparation specialist, to get the most out of this deduction while making sure all the necessary details are covered.

Mortgage Interest Deduction

The mortgage interest deduction allows you to deduct from your taxable income the interest you pay on any loan used to build, purchase, or make improvements upon your primary residence. You can also claim this deduction on a second mortgage for a second home or vacation home, with certain limitations. The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098.

Here's a quick list of what can qualify as mortgage interest:

  • Interest on primary mortgage

  • Interest on secondary mortgage

  • Prepaid points (this gets complicated, so confirm with a tax pro)

  • Mortgage on home equity loans

  • Mortgage insurance premiums

And, here’s a quick list of what doesn’t qualify:

  • Homeowners insurance

  • Extra principal payments

  • Title insurance

  • Settlement costs

  • Deposits, down payments, or earnest money that you forfeited

  • Interest accrued on a reverse mortgage

The interest deduction is an effective way for homeowners to reduce their taxable income, keeping more money in their pocket. (We’ll reiterate: always ask a tax pro to ensure you’re properly claiming this deduction.)

How the Mortgage Interest Deduction Works

Before you can report your mortgage interest paid, you’ll need to know what that amount is, and you can find that information in the Form 1098, provided by your mortgage servicer. You’ll report your mortgage interest on Schedule A of your 1040 tax form. You can even deduct interest paid on a mortgage for a rental property, which is reported on Schedule E. Often, mortgage interest is the single itemized deduction that allows taxpayers to exceed the standard deduction on their tax returns.

How To Qualify

Most years, homeowners can deduct the entire mortgage interest paid amount, as long as they meet all the requirements. The amount allowed for the deduction is reliant upon the date the mortgage began, the amount of the mortgage, and how the proceeds of that mortgage are used.

As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Also, grandfathered debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS), qualifies for the deduction.

  • Mortgages that the homeowner or their spouse (if filing jointly) took out after the “grandfathered debt” date to buy, build, or improve the home can qualify. However, said mortgages throughout the tax year, along with any grandfathered debt, can total no more than $1 million. For married couples filing separately, the limit is $500,000 or less.

  • Mortgage deductions can also be taken on loans for second homes and vacation residences, but there are limitations.

  • For mortgages that a homeowner or their spouse (again, if filing jointly) took on after the “grandfathered debt” date as home equity debt (but not as home acquisition debt) totaling no more than $100,000 – or if filing separately and married, $50,000 and under throughout the tax year – the mortgage interest can qualify for the deduction if the debt also did not total more than the fair market value of the home after certain adjustments.

  • The mortgage interest deduction can only be taken if the homeowner’s mortgage is a secured debt, meaning they have signed a deed of trust, mortgage, or a land contract that makes their ownership in qualified home security for payment of the debt and other stipulations.

Ask a Tax Pro

Like we said, it’s a bit (ok, a lot) complicated, and we are not the tax experts. But it can represent a significant tax break for homeowners all across the United States – especially if you’d like to itemize and claim more than the standard deduction, which wholly depends on your mortgage amount and interest paid. We hope this at least gives a better grasp on the deduction and, if anything, spurs you to discuss with your tax pro and get the most out of it.

Guardian Mortgage and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.