Deducting mortgage interest is as American as, well, taking out a mortgage to buy a house. (The data-crunchers at the Census Bureau say about two-thirds of houses have mortgage debt; many of the rest have had a mortgage at one time. If you have two houses, you can usually double your fun by deducting the mortgage interest on both of them. But as is usually the case with tax topics, certain conditions apply.
The Internal Revenue Service lets you deduct mortgage interest on two houses: your primary residence and one second home. If perchance you have two or more houses in addition to your primary residence -- look at you! -- you get to choose which one counts as your second home for tax purposes. Whichever homes you use, your name must be on the deed to each home, as well as on the mortgages, which makes you legally liable for payment.
Types of Debt
The home mortgage interest deduction doesn't just apply to loans you take out to purchase a home -- what people think of when you shout "mortgage" in a crowded theater. You can deduct interest on any loan that meets two conditions. First, the loan must be secured by the home itself -- the house is collateral for the loan. Second, you must have used the loan to buy, build or improve the home. Home equity loan used to build a garage? Deductible. Home equity loan used to buy a car to put in that garage? Not deductible.
The tax code limits how much mortgage debt is eligible for the interest deduction, so don't think you can buy that $20 million starter home in Malibu and get the IRS to eat the interest. You can deduct interest on up to $1 million worth of mortgage debt. That same limit applies whether the debt covers one house or two, and it applies to both single filers and married couples filing jointly. If you're married and filing taxes separately, the limit drops to $500,000.
The key word in "home mortgage interest deduction" is really "home." This deduction applies only to houses that you live in -- or those that at least are available for you to live in. If you make a house available for rent, a lot hinges on how much time the home is rented. If you own a second house and rent it out full time, the rent money becomes business income, and the interest on that house's mortgage becomes a business expense -- that is, not eligible for the home mortgage deduction. If, on the other hand, you rent the home out for 14 days or fewer in a year, the IRS considers it your private residence, so you can take the home mortgage interest deduction. If you rent it out for more than 14 days but less than full time, then some of the interest is "home mortgage interest" and some is a business expense. Call an accountant, pronto.
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.