When you buy a house with a mortgage, you are able to deduct the mortgage interest from your taxes. The type of deduction you are allowed to take depends on whether the mortgage is on your primary home or on an investment property. While the refinance mortgage deduction is a bit more generous, interest from both types can help reduce your tax bill and keep more money in your pocket.
Refinance Mortgage Deduction
When you take out a mortgage on your personal residence, you can claim the mortgage interest as an itemized deduction on your taxes. The IRS uses this deduction as a carrot to encourage home ownership. The interest deduction applies to the mortgages from an original purchase as well as a new mortgage from a refinance. To get this tax deduction, you need to be itemizing your tax deductions on Schedule A. If you are claiming the standard deduction, you aren't getting any tax benefit from your mortgage interest.
Refinance Deduction Limits
The mortgage interest deduction does have a couple of restrictions. The IRS does not want to give away too much of a good thing. Single taxpayers can write off the interest on the first $500,000 of mortgage debt. Married taxpayers can write off interest on up to $1 million of mortgage debt. In addition, you must use all the money from your mortgage loan to purchase or make improvements to your primary residence. If you meet both conditions, you can fully deduct your refinance mortgage interest from your taxes.
When you buy another house as an investment property, it doesn't count as your primary residence. As a result, you aren't allowed to double-dip and deduct the investment property's mortgage interest as a regular deduction. However, you will get a tax break if your investment property is making money as a rental. You can deduct your investment property's mortgage interest as an expense against your rental income. This will reduce your total rental income and make you a bit happier come tax time.
Investment Mortgage Deduction
If you are earning income a rental property, you'll need to report the income on IRS Schedule E. On this form, you also list your expenses for the year from running your rental property. This is where you list the mortgage interest from your investment property. On Schedule E, you subtract your total rental expenses from your total rental income. While the investment mortgage interest deduction doesn't reduce all your income taxes, it lightens the tax load from rental income.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.