Does My Home Qualify For The Mortgage Interest Deduction
You can only claim the mortgage interest tax deduction if your mortgage is for a qualified home, as defined by the IRS. As long as they qualify, you can write off mortgage interest on both your main home and a second home, as long as each home secures the mortgage debt.
The IRS considers a home to be any residential living space â including houses, apartments, condos, mobile homes, and houseboats â that has âsleeping, cooking, and toilet facilities.â
You Don’t Live In The Home
You can deduct the interest on a home mortgage only for:
- your main home — that is, the home where you ordinarily live most of the time, and
- a home that you choose to treat as your second home.
If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this second home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.
Common Deductible Interest Payments
Interest deductions arent limited to mortgages. Here are some of the most common deductible interest payments for rental property owners:
- Mortgage interest payments used to acquire the rental property
- Mortgage interest payments used to improve the rental property
- Interest on credit cards used for goods or services in rental activity
- Interest on personal loans for items used in rental activity
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What If I Refinanced
When you refinance a mortgage that was treated as acquisition debt, the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage. The excess over the old mortgage balance not used to buy, build, or substantially improve your home might qualify as home equity debt. For tax years prior to 2018, interest on up to $100,000 of that excess debt may be deductible under the rules for home equity debt. Also, you can deduct the points you pay to get the new loan over the life of the loan, assuming all of the new loan balance qualifies as acquisition.
That means you can deduct 1/30th of the points each year if its a 30-year mortgagethats $33 a year for each $1,000 of points you paid. In the year you pay off the loanbecause you sell the house or refinance againyou get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense on a pro-rated basis over the life of the new loan.
Why You Would Want To Use A Mortgage For Income Tax Deduction
During tax season, itâs always smart to claim as much as possible when filing taxes. Doing so will lower the amount of tax youâre required to pay the government, meaning youâll either lower the amount of taxes youâll have to pay or youâll increase the amount of tax return youâll be given by the government.
However, itâs important to know if your mortgage is tax-deductible before claiming it at tax time. Below are a few scenarios where your mortgage interest might be tax-deductible.
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Can You Deduct Points When Refinancing A House
Yes, you can deduct points when refinancing a house. The amount of points that you can deduct is based on the amount of interest paid over the loans life. For example, if you pay $2000 in points and your loan has an interest rate of six percent, then you can deduct $120 per year for the next ten years. If you refinanced your loan after five years, then you can only deduct $60 per year for the next five years.
There is a limit to how much interest you can deduct, so be sure to keep track of how much you are paying in interest each year. The IRS has a deduction limit of $750,000 for and $500,000 for individuals. Anything over this limit is not deductible.
How To Claim Tax
You might want to consult with a tax professional, or at the very least use reputable tax preparation software, if you think you qualify to claim any of these tax-deductible interest expenses. Each of them comes with its own filing requirements.
Mortgage interest and investment interest are itemized deductions. This means reporting them on Schedule A and submitting the schedule with your tax return. In this case, you are unable to claim the standard deduction.
The total amount of mortgage interest you paid during the year will appear on Form 1098, which your lender should send to both you and the IRS after years end. Use Form 4952 to calculate your investment interest deduction, and submit it with your tax return.
Adjustments to income are reported on Schedule 1, which also must accompany your tax return. You would claim your student loan interest deduction on this form. You should receive Form 1098-E from your lender after years end, showing how much interest you paid.
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Your Mortgage Is Too Large
There is a limit on the size of a home mortgage for which interest is deductible. If you purchased your home before December 15, 2017, you may deduct mortgage interest payments on up to $1 million in loans to buy, build, or improve a main home and a second home. If you purchased your home after December 15, 2017, new limits imposed by the TCJA apply: You may deduct the interest on only $750,000 of home acquisition debt: a reduction of $250,000 from prior law. The $750,000 loan limit is scheduled to end in 2025. After then, the $1 million limit will return.
Why Is There Opposition To The Mortgage Interest Deduction
The policy change that’s needed is something that makes ownership more attractive for individuals than for investors. The mortgage interest deduction won’t do it. It’s a policy tool that’s not particularly relevant for the buyers and homes in question because interest rates are already so low, and because the selling price of affordable homes is generally below the threshold for mortgage interest deductions. Plus, it’s a policy tool that’s out of favor with legislators.
Eligibility for the MID is selective and exclusionary. A household needs to own a home with a documented mortgage with a lender, excluding renters and homeowners without mortgages. Under these eligibility criteria, the MID advantages white households who have consistently higher rates ofhomeownership than households of color. The historic high homeownership gap between white and Black/Latino households further exacerbates the inequitable racial distribution of the MID. The MID aids households that have already experienced many advantages throughout the past century.
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How Much Interest Can I Claim
Most homeowners can deduct all of their mortgage interest. The Tax Cuts and Jobs Act , which is in effect from 2018 to 2025, allows homeowners to deduct interest on home loans up to $750,000. For taxpayers who use married filing separate status, the home acquisition debt limit is $375,000.
For mortgages that were taken out before December 16, 2017, the limits are higher. The same goes for borrowers who were under a binding contract by the December 16th deadline and closed before April 1, 2018. Those borrowers can deduct interest on loans up to $1 million or $500,000 for married, filing separately.
Qualifying mortgages include those used to buy or improve a first or second residence.Learn more about specific loan type rates
What Qualifies For A Mortgage Interest Deduction
Not all types of mortgage loans qualify for the home mortgage interest deduction. To determine what and if you can claim, you first need to determine whether youre eligible.
First, you should ensure:
In addition to the above, one of these must be true for your loan to be eligible for the mortgage interest deduction:
- You took out your mortgage loan before Dec. 16, 2017, to buy, build, or substantially improve your home, and your total mortgage debt for which youre deducting interest totaled less than $1 million through 2019 $500,000 or less for married taxpayers filing individually.
- You took it out after Dec. 15, 2017, to buy, build, or substantially improve your home, and your total mortgage debt for which youre deducting interest totaled $750,000 or less through 2019 $375,000 or less for married taxpayers filing individually.
If your mortgage debt is greater than the above limits, dont worry you may still be able to deduct some of your interest, but the calculation is going to be more complicated.
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Misconception : You Will Get A Tax Break
Despite the hype, the overwhelming majority of homeowners receive no tax break at all from the mortgage interest tax deduction. Keep in mind that to even qualify for the deduction, homeowners must itemize their deductions when determining their income tax liability. Itemizing provides an opportunity to account for specific expenses, including mortgage interest, property taxes, and partial medical expenses. As mortgage interest is often the largest of these expenses that a taxpayer pays, deducting it is often cited as a financial incentive to buy a home.
Taxpayers who do not have deductions that add up to more than the standard deduction amounts would not need to itemize, and, therefore, derive no tax benefit from paying interest on their mortgages.
Once again, while an attractive idea in theory, the reality is that passage of the TCJA means that itemizing deductions no longer makes sense for most people. For taxpayers who are single or married but filing separately, the standard deduction is $12,550 in 2021 . For heads of households, it is $18,800 in 2021 . For married couples filing jointly, the standard deduction is $25,100 in 2021 .
What Is The Standard Deduction
The standard deduction is an automatic deduction of your taxable income that you can receive without doing any itemized deductions.
If youre trying to decide whether to use the standard deduction amount or try to get more by doing itemized deductions, it is important to remember that under former President Donald Trump, a new tax law was introduced called the Tax Cuts and Jobs Act starting in tax year 2018. This act significantly raised the standard deduction amount for both households filing together and single individuals filing alone, Fan says.
For the 2021 tax year , the standard deduction amounts are:
- $12,550 for single and married filing separate taxpayers
- $18,800 for head of household taxpayers
- $25,100 for married filing jointly or qualifying widow taxpayers
Before the TCJA was passed in 2017, the amount was $6,350 for single filers and $12,700 for married filing jointly.
Since the standard deduction amounts rose so much, it does make it harder for people to have enough expenses to be able to itemize deductions, he says.
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Misconception : It Will Be A Hefty Deduction
Even for homeowners who itemize their taxes and qualify for the mortgage interest tax deduction, the amount of the deduction is a mere fraction of the amount of interest paid on the mortgage. Once again, a little number crunching is required to fully comprehend the situation because the deduction is not a tax credit.
You dont get a $1 tax break for every dollar spent you get pennies on the dollar. Unlike a creditwhich provides a dollar-for-dollar reduction on actual tax amounts owedthe mortgage interest deduction reduces the amount of total income subject to tax based on the taxpayers tax bracket.
For a simplified example, a taxpayer spending $12,000 on mortgage interest and paying taxes at an individual income tax rate of 24% would be permitted to exclude $12,000 from income tax liability, resulting in a savings of $2,880. In effect, the homeowner paid $12,000 to the bank in interest to get less than a fourth of that amount excluded from taxation.
Spending $12,000 to reduce the amount of money you will pay in taxes by $2,880 simply makes no sense. Worse yet, an honest assessment of the actual bottom-line savings should factor out the value of the standard deduction. The table below provides a comparison.
|$2,880||$3,144 in favor of standard|
|$4,200||$4,585 in favor of standard deduction|
Its A Tax Break That Fewer And Fewer Homeowners End Up Taking
Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
A Tea Reader: Living Life One Cup at a Time
The home mortgage interest deduction is one of the most cherished American tax breaks. Realtors, homeowners, would-be homeowners, and even tax accountants tout its value. In truth, the myth is often better than reality.
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Second Mortgage Tax Deductions
You may be able to deduct interest on a second mortgage, usually a home equity loan or home equity line of credit . But, since 2018, you can only do so if you used the money to buy, build, or substantially improve your main residence or second home. Older loans have no such rule.
Again, theres a cap. You can only deduct the interest on the first $100,000 of your second mortgages value.
What Is Not Deductible As Mortgage Interest
There are a few items that are not deductible as part of the mortgage interest deduction. These items arent directly related to the mortgage itself and are actually additional costs to consider when purchasing a home. The items that dont qualify are:
- Settlement costs
- Forfeited deposits or earnest money
- Extra principal payments made on the mortgage
- Title insurance
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Management And Administration Fees
You can deduct the amounts paid to a person or a company to manage your property.
You can also deduct amounts paid or payable to agents for collecting rents or finding new tenants.
If you paid commissions to a real estate agent when selling your rental property, include them as outlays and expenses on Schedule 3, Capital Gains , when you report the disposition of your property.
Definition And Examples Of Tax
You must pay interest in most cases when you borrow money. Its the price you pay for the loan. Whether you can deduct it on your tax return depends on the type of loan and interest accrued, as well as if it is accepted by the Internal Revenue Code .
The IRC does not give a nod of approval to interest paid on auto loans, , or any thats related to tax-exempt income. But you can subtract or deduct interest incurred for other personal purposes deemed acceptable, including student loans, investments, and qualified mortgages.
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Are Seller Closing Costs Tax Deductible
When it comes to seller closing costs, the giant one is real estate agent commissions. They usually total about 6% of a homes sales price.8 But youre out of luck if you want to deduct commissions from your income taxes. However, keep in mind that if youve lived in a home for at least two years, you only have to pay taxes on the profit from the sale of your home if you made more than $250,000 for a single filer or $500,000 for a married filer.9
Now, if youve lived in a home for less than two years, youll owe capital gains taxes. When calculating your profit to figure out how much you owe, you can add closing costs to the overall cost of your home. So this is kind of like a deduction that will lower the profit you owe capital gains taxes on.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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