Millions of US homeowners rely on the Mortgage Interest Tax Deduction to reduce the true cost of ownership of their homes and have more disposable income. Introduced in 1913 along with the Income Tax Act, the Home Mortgage Interest Tax deduction can be used to your advantage if you know the rules.
Limits of the Home Mortgage Interest Tax Deduction
All interest paid on mortgages can be deducted from your US Federal taxes if you meet the following requirements:
- Fills out Form 1040 and items out his deductions on Schedule A.
- Is legally liable for the mortgage loan and does not pay interest on behalf of someone else's loan
- The home is a qualified home
There are 2 types of debt that fall under the Home Mortgage Interest Tax deduction provision and are tax-deductible. The first type of debt is debt that was acquired in order to build, purchase or improve your home. The second type of debt is called equity debt because the collateral used is drawn on the equity of your home. You can therefore take out a maximum debt of $1.1 million and deduct the mortgage interest from your taxes payable. However, any of the mortgages you acquire must fall into 1 of the following categories:
- Debt Acquired Before October 13, 1987: Referred to as "Grandfathered debt", you can deduct all interest paid on any of this debt.
- Debt Acquired After October 13, 1987: If you took out this debt to build, purchase or improve your home, you can fully deduct all interest paid on this debt provided the total debt you acquired (including the Grandfathered Debt) does not exceed $1 million for married couples or $500,000 for singles.
- Home Equity Debt Acquired After October 13, 1987: If you acquired debt after this date for reasons OTHER than to build, improve or purchase your home, the maximum can be $100,000 for married couples or $50,000 for singles.
Remember that mortgage interest is tax deductible only if the debt you acquire is secured debt - meaning your home is pledged as collateral on the debt (meaning the bank can possess your house if you do not keep up with payments). Mortgage interest is NOT deductible on unsecured debt - unsecured debt is considered as personal loan.
Qualified Home?
In order to make your mortgage interest tax deductible, you must make sure your home is a Qualified Home. A qualified home is one that has cooking, sleeping and toilet amenities. Types of houses that can fit into this definition include:
- Primary home
- Condominium
- Mobile Home
- Boat
- House Trailer
If your house is your second home, you must reside in it for atleast 14 days a year in order to make its mortgage interest tax deductible and you can only have 1 second home. If your second home is rental property, you must LIVE in it for atleast 10% of the total time the property is rented out.
Home Mortgage Refinance
Refinancing your home mortgage allows you to shorten the term of the loan and reduce your monthly mortgage payments. If you refinance your home without taking on additional debt, all the interest paid on your mortgage is still tax deductible.
IRS Audit
If the IRS (Internal Revenue Service) audits your home, you should have Form 1098 - Mortgage Interest Statement ready. You can acquire this form from the bank or company that holds your mortgage. If you make your mortgage payments to an individual, supply the following data to the IRS:
- Name
- Address
- Social Security Number
- Amount of Interest Paid
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