What is the Mortgage Interest Deduction?
The Mortgage Interest Deduction allows a homeowner to deduct from taxable income the interest he/she pays on a mortgage for his/her home. Rather, it is an itemized deduction that must be claimed on Schedule A of Form 1040 instead of opting for the standard deduction. This exemption allows for interest deductions on loans that have been borrowed to either acquire or construct the taxpayer’s principal or secondary residence that is considered “qualified” according to IRS stipulations. A kind of consolation prize for entering into a mortgage, it has limits and restrictions, such as the amounts of debts for which one could claim the deduction and whichever proof of payments secured from the lender (Form 1098).
How Does the Mortgage Interest Deduction Work?
To claim this deduction, you will need to do the following:
- Qualifying for the Loan: It must be a mortgage on your primary or second home that you do not rent out full-time; the loan must be secured by the property (meaning if you default, the lender can take it). Loans funded through banks and private lenders and recorded loans from family members are all valid.
- Check the Limits: Unless secured for another property purpose with the liability on the loan for unfavorable product location (not excluded from deduction purposes), interest deductions on up to $750,000 worth of debt (or $375,000 if married but filing separately) are given for mortgages on homes purchased after December 15, 2017. Loans for the purchase of homes contracted before the year 2017 were capped at $1 million ($500,000 for married persons filing separately). Ultimately, on the interest on those home equity loans, the deduction is applicable only for funds used to pay for the acquisition, including repairs to the home, not, let’s say, for a new car.
- Get Form 1098: Form 1098 will be sent to you by your lender by January 31, reporting interest paid for the year 2025. You will utilize Box 1 (mortgage interest) and Box 5 (points if applicable).
- Itemize on Schedule A: Add together your mortgage interest, property taxes (up to $10,000), and any other deductions. If the total exceeds the standard deduction, file Schedule A with Form 1040.
Cash-basis taxpayers (most of us) deduct interest in the year it’s paid—be careful about your payment dates if you are close to December!
Key Details for the Mortgage Interest Deduction
- Qualified Home: Must have sleeping, cooking, and toilet facilities—think house, condo, mobile home, or boat. Rentals don’t count unless you live there part-time (see Publication 936).
- Points: Those upfront fees you paid to get a lower rate? Deductible over the loan term, or all at once if it’s your main home and meets IRS tests (e.g., typical amount, listed on settlement statement).
- Limits: $750,000 debt cap (post-2017 loans) applies to total principal across all qualified homes. Refinances follow the original loan’s date for cap purposes.
- Who Claims It: You’re the borrower on the loan and actually paid the interest—cosigners don’t count unless they’re on title and paying too.