For most people to make the jump to homeownership, they need a mortgage to help pay for the purchase. But, banks and credit unions don’t issue mortgages out of charity, they do so to make a profit. As you repay your mortgage, a portion of each payment goes toward the interest that accrues on your loan. However, that money might not be a complete loss, as some taxpayers are able to claim a deduction for mortgage interest on their income taxes.
Depending upon the specific nature of your loan, you may be able to claim a tax a deduction on your mortgage interest.
Exploring Qualifying Mortgages
To qualify for the mortgage interest deduction, the mortgage must be used to purchase, build or substantially improve your primary residence or your second home. The mortgage must be secured by the home. Homes can include a house, mobile home, condo, house trailer or even a boat, as long as the “home” has eating, sleeping and toilet facilities.
For a second home to qualify, you must either not rent it out at all, or use it for personal use for the longer of 10 percent of the time it is rented out or 14 days. You can only have one second home at a time for tax purposes.
Mortgage interest on loans secured by your home, but not used for qualifying purposes, cannot be deducted. For example, if you take out a home equity loan to pay for your child’s college costs, you can’t deduct that interest.
Evaluating Limits on Mortgage Size
For mortgages taken out prior to 2018, you can deduct the interest on the first $1 million ($500,000 if married and filing separately) of mortgage debt. However, as part of The Tax Cuts and Jobs Act of 2017, mortgages that were taken out in 2018 or later are limited to only allowing a deduction for the interest on the first $750,000 ($375,000 if married and filing separately). If your mortgage exceeds the limits, some of your mortgage interest won’t be tax-deductible.
Understanding Itemization Requirements
Even if you meet all of the requirements for claiming mortgage interest as a deduction on your taxes, it might not actually help you lower your tax bill. The tax code classifies the mortgage interest deduction as an itemized deduction, meaning you can’t claim it, or any other itemized deductions like charitable contributions or state and local taxes unless you forgo your standard deduction.
For the 2019 tax year, the standard deduction is $12,200 if you’re single and $24,400 if you’re married and filing jointly. Therefore, unless your total itemized deductions, including your mortgage interest, exceeds your standard deduction, you won’t actually save any money on your taxes.