Please note: While we aim to provide you with accurate information, we are not licensed accountants and any financial decision you make please refer to your accountant or other registered professional.
If you are an American homeowner, chances are good you qualify for a hefty tax deduction on your home mortgage interest. While that may seem simple, there are actually quite a lot of little factors that go into your tax deduction. For example, did you know that you can qualify for a deduction if your home is a condominium, a cooperative, a mobile home, or even a boat or recreational video?
There’s a lot you might not know about mortgage-interest deductions. If you’d like to learn more, just continue reading!
It pays to take mortgage interest deductions
If you itemize, you can usually deduct the interest you pay on a mortgage for your main home or second home, but those deductions do come with restrictions. Let’s go over them together, read on below.
What counts as mortgage interest?
Deductible mortgage interest is any interest that you pay on a loan that has been secure by a main home or second home that was used to buy, or add substantial improvements to your home. For tax years prior to 2018, the maximum amount of debt eligible for the deduction was $1 million. For tax years after 2017, the maximum amount of debt is limited to $750K. Mortgages that existed as of December 14, 2017 will continue to receive the same tax treatment as under the old rules. On top of that, for tax years prior to 2018, the interest paid on up to $100,000 of home equity debt was also deductible. These loans include the following:
- A mortgage to buy your home
- A second mortgage
- A line of credit
- A home equity loan
- Plus More
If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually is not deductible.
Your home mortgage has to be secured by your main home or a second home. That means you cannot deduct interest on a mortgage for a third home, a fourth home, etc.
What kinds of loans qualify for the deduction?
If all your mortgages fit in one or more of the following categories, you can expect to be able to deducts all of the interest you paid during the year:
- -Mortgages that you took out on your main home and/or a second home on or before October 13, 1987. That’s called “grandfathered” debt because these are mortgages that existed before the current tax laws took effect.
- -Mortgages you took out after October 13, 1987 to buy, build, or improve your main home and/or second home that totaled $1 million or less for tax years prior to 2018 of $750K or less for tax years after 2017. Mortgages that existed as of December 14, 2017 will continue to receive the same tax treatment as under the old rules.
- -Home equity debt that you took out after October 13, 1987 on your main or and/or second home that totaled $100,000 or less throughout the year for tax years prior to 2018. Interest on such home equity debt was typically deductible no matter how you use the loan. That means you can used it to pay for education, debt, or other personal purposes. This does assume, however, that the combined balances of acquisition debt and home equity do not exceed the home’s fair market value at the time you take out the home equity debt.
How do I know what qualifies as a home?
According to the IRS, a home can be a house, a condo, a cooperative, a mobile home, a boat, a recreational vehicle, or a similar property that has sleeping, cooking, and toilet facilities. As you see, it is actually quite flexible, and as long as you own the property that you live in, chances are good it can be considered a home for tax purposes.
Who qualifies for a deduction?
You do! As long as you are the primary borrower, you are legally obligated to pay the debt and you have to actually be making the payments. If you are married and both you and your spouse decide to sign for the loan, then both of you are the primary borrowers. If you pay your child’s mortgage to help them out, however, you cannot use that mortgage to add to your deduction. That is, unless you co-sign on the loan.
Is there a limit to the amount I can deduct?
Of course there is! Your deduction is typically limited if all mortgages used to buy, construct, or improve your first home – and/or second him – totals more than $1 million for tax years prior to 2018. That number dips down to $500K if you are married, but filing separately. After the 2017 tax year, the limit is lowered to $750K.
What if I refinanced my loan?
When you refinance your mortgage that was treated as acquisition debt, the balance of the new mortgage will also most likely be viewed as acquisition debt up to the balance of the old mortgage. What ever the refinance goes over the old mortgage balance not used to buy, build, or substantially improve your home might qualify as equity debt. For tax years up to 2018, interest on up to $100K may be deductible.
In addition to that, you can deduct the points to get the new loan over the life of the loan. That means you can deduced 1/30th of the points each year if it is a standard 30-year mortgage. That’s $33 a year for each $1,000 of points paid.
Now that you have some basic facts about mortgage-interest tax deductions, you probably know whether or not you qualify for get some money back for all the money you’ve put into your home. This is the first step. The next step is either doing the research yourself and/or reaching out to a professional and finding out just how much you can get back for you home at the end of the upcoming tax year.
Please bear in mind the above information is for informational purposes only and not to be taken as taxation advice, for that you would need to speak with a qualified tax professional.