You can write off every penny of mortgage interest you pay this year -- provided you itemize deductions on Schedule A. If you take the standard deduction, which often gives taxpayers a better deal, you're out of luck. There are exceptions, however, that allow you to take the standard deduction and still write off at least some of your interest.
If you use part of your home exclusively for business -- an office, for example, or storage for inventory -- you can deduct a portion of your mortgage interest, reflecting how much space the business takes up. If you use, say, 12 percent of your house for business, you can deduct 12 percent of utilities, insurance and mortgage interest. Usually the area has to be exclusively for business: taking conference calls while you're cooking in the kitchen does not a home office make.
If you own a rental property, you treat mortgage interest on the building as a business expense. Instead of deducting the interest on Schedule A, you take it off your rental income, usually on Schedule E. You can also write off some of the interest if you use part of your home -- a garage apartment or the basement -- as a rental. This works the same as with other home business uses: If the apartment is 8 percent of the house, you get an 8 percent write-off.
If deducting mortgage interest and other home-business expenses results in a loss this year, you can't write off the red ink against your other income. Instead, carry it over and deduct against your business income next year. You carry over red ink from your rental property to next year too, unless you're actively participating in the business -- vetting tenants, calling repair people or advertising vacancies, for instance. In that case you can deduct up to $25,000 from other income.
To deduct interest for the business or rental use of your home, the house has to meet the same "qualifying home" standard as when you itemize. You can only deduct interest on your primary residence and one vacation home: if you have three homes, you can only write off the interest on two of them. You can only deduct interest on $1 million in debt or less. If your house has a $2 million mortgage, only half the interest is deductible on Schedule A, so you get only half the interest deduction for your home office too.
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