Home Mortgage Interest Deduction Information

By | January 27, 2014

What is the home mortgage interest deduction?

The home mortgage interest deduction is one of the most lucrative major tax-breaks available to Americans. If you own a home, the interest you pay on your home mortgage provides one of the best tax breaks available because the interest you pay on your home mortgage is tax deductible. However, not all interest paid on a home related loan will qualify for the home mortgage interest deduction. Certain tax rules must be examined to make sure taxpayers taking the home interest deduction are in compliance with tax laws.


Home Mortgage Interest Deduction Information

It used to be the case that pretty much all interest payments were deductible that were related to a home. However, that has changed and the home mortgage interest deduction was been a constant target during talks of tax reform. Those who can afford to buy a home are rewarded with a reduced tax liability thanks not just to the mortgage interest deduction, but also the deduction of property tax payments. The ability to take advantage of these deductions often opens up the entire Schedule A Itemized Deductions that often leads to substantial deductions for things like: charitable contributions, medical expenses, vehicle registration fees and state income taxes paid.


Personal interest (credit card debt) is a disallowed deduction

Generally, personal interest (credit card debt) is a disallowed deduction, but one kind of interest that remains deductible is qualified residence interest. Qualified residence interest is interest incurred from buying, building, or improving your qualified residence, or from home equity loans on that residence.


Taxpayers can deduct interest from up to two qualified residences:

  • Your primary home and
  • One other vacation home or similar property.
  • You cannot deduct mortgage interest with respect to a third residence.

Taxpayers cannot deduct the interest for acquisition debt greater than $1 million. For married individuals filing separately this limit would be $500,000. For example, if someone bought a $1.2 million house with a $1 million mortgage, only the interest that you pay on the first $1 million in debt will be deductible. The rest will be considered personal interest and non-deductible for tax purposes.


$1 million ceiling on deductible home mortgage debt

The $1 million ceiling on deductible home mortgage debt includes both your primary residence and your second home combined. This is not a ceiling of $1 million for each residence. For example, if you have  $800,000 mortgage on your primary home and a $400,000 mortgage on a vacation home,  $200,000 of the total as nondeductible personal interest. The IRS heavily scrutinizes the home mortgage interest deduction and receives verifying information from banks.


Deducting Interest on Home Equity Loan

There are different IRS rules for home equity loans. Home equity debt is secured by your principal or second residence and is treated much differently than acquisition debt. The home equity debt deduction is limited to the lesser of $100,000 ($50,000 if your filing status is married filing separately) or your equity in the home.

The interest that you pay on a qualifying home equity loan is generally deductible regardless of how you use the loan proceeds, except when the proceeds are used to purchase tax-exempt obligations. The loan can be a first mortgage, a second mortgage, or a home equity type loan. The type that is right for you will depend on factors such as how much you’ll pay in closing charges (including points), how much interest you’ll pay, and the size of your outstanding home loan amount.


Credit card debt is not deductible

If you a taxpayer has equity in their home and also have other debts, this could create a saving opportunity. Credit card debt is not deductible and usually carries a higher interest rate than home equity interest. By converting your nondeductible, higher-rate, credit card debt to home equity indebtedness you can save on taxes and on the interest rate. If you refinance your existing loan to pay for an expansion or remodeling of your home, all of the interest you pay on the new loan usually will be deductible as acquisition debt. Here, the decision-making process often involves financial as well as tax considerations

An important note, is that interest on a home equity loan isn’t deductible for purposes of the alternative minimum tax (AMT), unless you use the loan to improve your home. This is an important consideration, since an increasing number of taxpayers are subject to the AMT and they may not even know it.


Relevant IRS Forms and Publications for Home Mortgage Interest Deduction