If you have a mortgage on your home, you can deduct interest you pay on the loan when you file your income taxes. You need to itemize your tax deductions, and there is a cap on the amount of debt on which you can deduct interest. You generally can't deduct on other types of loans that aren't secured by your home, including credit cards and auto loans. If you rent your home, there's no federal tax deduction for your rent, although some states do have deductions for renters.
You won't get a full mortgage interest refund from the Internal Revenue Service, but you can generally deduct the interest you pay from your taxable income. You must itemize your deductions to claim the mortgage interest deduction.
The Mortgage Interest Deduction
The federal mortgage interest deduction is one of the tax benefits available to homeowners. IRS mortgage rules allow you to deduct what you pay toward mortgage interest from your taxable income. Like other tax deductions, it reduces the amount of money on which you must pay tax rather than providing a dollar-for-dollar tax credit.
To claim the deduction, you must own a home and have a mortgage or a similar loan secured by the home's value. As of tax year 2018, for taxes filed in 2019, single people and married people filing jointly can deduct interest on up to $750,000 worth of loan principal, and married people filing separately can deduct interest on up to $375,000 in loans.
Mortgage Interest Deduction Limit Exceptions
Those limits are down from $1,000,000 and $500,000 from previous years, although loans taken out before the new limits went into effect are still subject to the old limits. Specifically, you must have taken out the loans before Dec. 16, 2017 for them to qualify. An exception applies if you entered a contract on Dec. 15, 2017 or earlier to close on a house with such a mortgage by Jan. 1, 2018 and finished the purchase by April 1, 2018. Contact the IRS or a tax adviser if you're not sure whether you meet the requirements.
Other types of loan interest are generally not tax deductible, meaning you can't generally take a deduction on a car loan, personal loan or credit card, even if you've paid interest.
Itemize Your Deductions
You need to itemize your deductions in order to take the mortgage interest deduction, which means that if you only paid a small amount of interest and don't have many other deductions, it can be more advantageous to take the standard deduction. As of the 2018 tax year, the standard deduction is $12,000 for single filers and married people filing separately, $18,000 for taxpayers filing as head of household and $24,000 for married couples filing jointly.
It's often worth seeing if your itemized deductions bring you a larger deduction than the standard. Tax software or a tax preparer can help you with this calculation. Other common itemized deductions include charitable donations and medical or dental expenses in excess of 7.5 percent of adjusted gross income.
Other Tax Benefits for Homeowners
Another tax benefit commonly taken by homeowners is the state and local tax deduction, abbreviated SALT. It enables you to deduct money paid to local and state governments from your federal taxable income. Homeowners commonly use this deduction to reduce the impact of property taxes. As of tax year 2018, the deduction is capped by the Tax Cuts and Jobs Act at $10,000. Previously it was unlimited.
Homeowners also get to deduct up to $250,000 in capital gains, or up to $500,000 for married couples, when they sell their homes. This deduction only applies to those who have used the home as a primary residence for two of the preceding five years and haven't taken another such deduction within the past two years.
Renters generally don't see the same tax benefits as homeowners on a federal level, although some states do provide tax relief for people who rent a home.