Mortgage Interest Deduction

What Is a Mortgage Interest Deduction?

The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations.

The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098. This deduction is offered as an incentive for homeowners.

How a Mortgage Interest Deduction Works

Introduced along with the income tax in 1913, the mortgage interest tax deduction has since become the favorite tax deduction for millions of U.S. homeowners.

Home mortgage interest is reported on Schedule A of the 1040 tax form. The mortgage interest paid on rental properties is also deductible, but this is reported on Schedule E. Home mortgage interest is quite often the single itemized deduction that allows many taxpayers to itemize; without this deduction, the remaining itemized deductions would not exceed the standard deduction. Interest from home equity loans also qualifies as home mortgage interest.

The Tax Cuts and Jobs Act (TCJA) passed in 2017 changed the deduction. It reduced the maximum mortgage principal eligible for the deductible interest to $750,000 (from $1 million) for new loans (which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt). But it also nearly doubled standard deductions, making it unnecessary for many taxpayers to itemize.

As a result, most went on to forgo the use of the mortgage interest tax deduction entirely. For the first year following the implementation of the TCJA, an estimated 135.2 million taxpayers were expected to opt for the standard deduction.

By comparison, 20.4 million were expected to itemize, and, of those, 16.46 million would claim the mortgage interest deduction. More than 80 million mortgages are outstanding in the United States, which suggests that the vast majority of homeowners receive no benefit from the mortgage interest deduction.

Qualifications for a Full Mortgage Interest Deduction

In 2017, the Tax Cuts and Jobs Act (TCJA) limited how much interest homeowners could deduct from taxes. Instead of single or married filing jointly taxpayers deducting mortgage interest on the first $1 million ($500,000 for married filing separately) of their mortgage, they can now only deduct interest on the first $750,000 ($$375,000 for married filing separately taxpayers) of their mortgage.

However, some homeowners can deduct the entirety of their mortgage interest paid, as long as they meet certain requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage, and how the proceeds of that mortgage are used.

As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Legacy debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS) qualifies for the deduction.

Mortgages issued before Oct. 13, 1987, have no limits. This means, that taxpayers can deduct any mortgage interest amount from taxes. Mortgages issued between Oct. 13, 1987, and December 16, 2017, and homes sold before April 1, 2018, can deduct mortgage interest on the first $1 million ($500,000 for married filing separately taxpayers) of their mortgage. For the latter, the sales contract must have been executed by Dec. 15, 2017, with a closing conducted before April 1, 2018.

Mortgage deductions can also be taken on loans for second homes and vacation residences, but there are limitations.

Special Considerations

For mortgages that a homeowner or their spouse (again, if filing jointly) took on after the “grandfathered debt,” or legacy debt, date as home equity debt (but not as home acquisition debt) totaling no more than $100,000–or if filing separately and married $50,000 and under throughout the tax year–the mortgage interest can qualify for the deduction if the debt also did not total more than the fair market value of the home after certain adjustments.

The mortgage interest deduction can only be taken if the homeowner’s mortgage is a secured debt, meaning they have signed a deed of trust, mortgage, or a land contract that makes their ownership in qualified home security for payment of the debt and other stipulations.

Examples of the Mortgage Interest Deduction

Under the Tax Cuts and Jobs Act of 2017, the mortgage limits for the mortgage interest deduction have decreased. In addition to the mortgage interest deduction change, what can be included as an itemized deduction has changed, disallowing many from claiming what they previously claimed. Despite these changes, the mortgage interest deduction can still prove valuable for some taxpayers.

When the Mortgage Interest Deduction Is Beneficial

For example, consider a married couple in the 24% income tax bracket who paid $20,500 in mortgage interest for the previous year. This tax year, they wonder if itemizing deductions would yield a larger tax break than the $25,100 standard deduction. If the total of their itemized deductions exceeds the standard deduction, they will receive a larger tax break.

After totaling their qualified itemized deductions, including the mortgage interest, they arrive at $32,750 that can be deducted. Since this is larger than the standard deduction, it offers a greater benefit: $7,860 ($32,750 x 24%) vs. $6,024 ($25,100 x 24%).

When the Mortgage Interest Deduction Is Not Beneficial

A single taxpayer in the same 24% tax bracket also wonders if itemizing taxes would result in a lower tax liability. The taxpayer paid $9,700 in mortgage interest for the previous year and only has $1,500 of deductions that qualify to be itemized. The standard deduction for a single taxpayer for 2021 is $12,550. Because the total itemized deductions ($11,200) is slightly less than the standard deduction, it does not benefit the taxpayer to itemize for the tax year.

Essentially, the homeowner receives no benefit for the paid interest, and the mortgage interest deduction goes unclaimed.

Mortgage Interest Deduction FAQs

Can You Deduct Both Property Taxes and Mortgage Interest?

Homeowners that itemize taxes and meet the qualification for deducting mortgage interest can deduct property taxes and mortgage interest from their taxes.

Can Co-Owners of a Property Deduct Mortgage Interest?

Co-owners of a property can deduct mortgage interest to the extent that they own the home. For example, if two people own the house equally, each can deduct up to 50% of the mortgage interest from taxes, subject to mortgage interest deduction limits.

How Much Does the Mortgage Interest Deduction Cost the Government?

The mortgage interest deduction costs the U.S. government approximately $70 billion per year.

Can You Use the Mortgage Interest Deduction After You Refinance Your Home?

The mortgage interest deduction can be taken after refinancing a home if the refinance is on a primary or secondary residence. The mortgage interest can be deducted if the money was used for a capital home improvement — an improvement that increases the value of the home.

The Bottom Line

The mortgage interest deduction allows homeowners, who itemize taxes, to claim a tax deduction for interest paid on their mortgage. Under the Tax Cuts and Jobs Act of 2017, the limits decreased from $1 million to $750,000, meaning the mortgage interest deduction can now be claimed on the first $750,000 of the mortgage, rather than the first $1 million. However, some homeowners benefit from legacy clauses that exempt them from the new rules.