How Much Mortgage Interest Is Tax Deductible?

How Much Mortgage Interest Is Tax Deductible?

Posted by Colton Hoisager on Mar 9, 2021


One benefit of home ownership is the ability to deduct your mortgage interest on your taxes. 

A tax deduction is the amount you can subtract from your taxable income at the end of the year for qualified expenses. Lowering your taxable income with deductions usually means a lower tax bill. In addition to mortgage interest, other deductions can include business expenses, charitable contributions, and medical expenses under certain circumstances. 

The amount of mortgage interest that is tax deductible has varied over the years and is set by the Internal Revenue Service (IRS). Currently, mortgage interest on up to a $750,000 principal balance can be deducted. The limit is $350,000 for someone who is married, filing separately. 

If you obtained a loan before Dec. 15, 2017 mortgage interest can be deducted up to a $1 million loan value, or $500,000 if married filing separately. 

For mortgage interest to be deductible there are guidelines, and while we will cover some of the most important, keep in mind this does not cover all the IRS qualifications for deductions. 

In order to qualify for a mortgage tax deduction the loan should: 

  • Be a secured debt, meaning a mortgage, deed, or contract are signed. 
  • Be for a property that has sleeping, cooking, and bathroom facilities including condos, mobile homes, boats, or single-family homes, among others. 
  • Be used for buying or building one of the above properties, or be used to make substantial improvements that will either extend the life, increase the value, or change the use of an area of the property. 
  • Be primary mortgages on a first or second home only. The limits apply to the combined value of both properties. 

Example: If you own a home for $400,000 and purchase a second home for $400,000, you should be able to write off the interest on the first $750,000. If the second home was $100,000 and you purchase a third home for $100,000, only the interest on $500,000 of loans would be deductible ($400,00 first home + $100,000 second home, the third property would not qualify). 

  • Be a loan on a property that you have an ownership interest. 
  • Be for a home that is used as a residence by the owner for at least 14 days of the year or 10% of the number of days it is used as a rental. 

The interest on home equity debt is not deductible as of 2018 unless the funds are being used to substantially improve the property. The difference between a mortgage and home equity debt is that you obtain the latter after you own a property and gain equity and a mortgage is the financing used to buy the property initially. 

Standard Deductions vs. Itemized Deductions

Mortgage interest would be included as a deduction if you choose to itemize deductions instead of taking the standard deduction. For some people it is not beneficial to itemize deductions. 

Usually, the only time a person itemizes is if their deductions are greater than the standard deduction amount. This depends on every taxpayer's situation, and so consulting with a tax professional is the best way to determine if you would benefit from itemizing deductions. In 2020, the standard deductions were $24,800 for a married couple, $12,200 for a single person, and $18,350 for the head of household. 

To determine how much interest you paid on a mortgage, the lender will send you a Form 1098 that you can provide to your tax professional. 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

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