Interest on Home Mortgage in content page of articles
You can deduct qualified mortgage interest on your main home and a second home if you itemize deductions on Schedule A. You must be legally liable for repayment of the loan to deduct the loan interest.
You can increase the amount of your deduction by making extra mortgage payments during the year. Ex: If you pay your January mortgage payment in December, you'll have 1 month's extra interest to deduct. This might work in your favor if you’re bunching other deductions, like charitable donations.
Qualified Mortgage Interest
You can fully deduct most interest paid on home mortgages. However, there are exceptions. You must first separate qualified mortgage interest personal interest. Mortgage interest is usually deductible. Personal interest isn't deductible.
Home mortgage interest is interest on debt that’s secured by a main home or second home. It's considered interest on acquisition debt or interest on home-equity debt.
Acquisition debt is debt incurred to buy, build, or improve a home. Home-equity debt is debt incurred for any purpose other than buying, building, or improving the home.
However, home-equity debt isn’t a home-equity loan or line of credit. You secure a home-equity loan with your home, but part of the money might be:
Acquisition debt if you use it to build an addition to your home
Home-equity debt if you use it to pay for college or to buy a boat
You can fully deduct interest you pay on acquisition debt if the debt isn’t more than $1,000,000 -- $500,000 if married filing separately -- any time during the tax year. You can also deduct the full amount of interest you pay on home-equity debt if the debt isn’t more than the lesser of:
$100,000 -- $50,000 if married filing separately -- any time during the tax year
The difference between the fair market value of your home and the remaining acquisition debt
Ex: In 2006, Christopher purchased his main home for $500,000. Four years later, when he owed $400,000 on the original mortgage, he took out a $60,000 home-equity loan and used the proceeds to build a sunroom and install an indoor pool. Since his home is now worth $700,000, he decides to take out another $130,000 home-equity loan and buy a sailboat.
On his 2012 return, he can deduct the interest he pays on:
The $400,000 left on the original mortgage (acquisition debt)
The $60,000 sunroom / pool loan (acquisition debt)
$100,000 of the sailboat debt (home equity debt). He can't deduct the interest paid on the remaining $30,000 of sailboat debt since it’s more than the $100,000 limit on home-equity debt.
For Alternative Minimum Tax (AMT) purposes, you can’t deduct interest paid on loan proceeds you didn't use to buy, build, or improve your home. (Ex: like the sailboat debt above)
Under mortgage-interest rules, you can treat all debt incurred before Oct. 14, 1987, and secured by a main or second home as acquisition debt. This debt is referred to as grandfathered debt. It isn’t subject to the $1,000,000 cap. However, it reduces the $1,000,000 and $100,000 limits if you incur any more debt on the home after Oct. 13, 1987.
Ex: Stacey’s main home is worth $3.2 million, and she has a $2 million outstanding debt on the residence. She incurred the debt before Oct. 14, 1987. She can deduct all the interest she pays on the $2 million debt on her 2012 return. However, if she borrows more money, even for a home improvement, she can't deduct the interest. She would have already exceeded the $1 million acquisition-debt limit and the $100,000 home-equity debt limit.
You might be offered a home-equity loan or line of credit that’s more than the fair market value of your home. If so, you might not be able to deduct all of the interest on these home-equity debts. Figuring your mortgage-interest limits in this situation can be complex.
Ex: Eileen bought her home in 2007 for $155,000, and took out a $147,250 mortgage (acquisition debt). In January 2012, she took out a home-equity loan to consolidate her other debts at a lower interest rate (home-equity debt).
When she took out the loan, her remaining mortgage principal was $138,600 and the fair market value of her home was $165,000. The lender allowed her to borrow up to 110% of her home's fair market value. So, she borrowed $42,900, the maximum amount allowed.
The lender calculated the maximum amount she could borrow as:
$165,000 (fair market value) x 110% = $181,500 (limit)
Since $26,400 is less than $100,000, the maximum amount she can deduct is the interest on $26,400. Since she borrowed $42,900, the interest on $16,500 of her home-equity debt isn’t deductible:
$42,900 (amount borrowed) - $26,400 (maximum amount she can deduct) = $16,500
Points are also known as:
Maximum loan charges
They're equivalent to mortgage interest paid up front when you receive your mortgage. One point equals 1% of the mortgage loan amount.
To deduct points as mortgage interest, you must pay points only for the use of money. You can’t deduct fees paid to cover services like:
Lender's appraisal fee
Since points represent interest paid in advance, you usually must deduct them over the life of the loan. However, you might be able to deduct all points incurred to finance the purchase or improvement of your main home in the year you paid the points.
Deducting Points in the Year Paid
You can fully deduct points in the year you paid them if all of these apply:
You're using a cash method.
You secured the mortgage loan with your main home.
The charging of points is an established business practice in the area.
The points paid weren't more than the number of points usually charged in the area.
The points weren't paid in place of amounts ordinarily stated separately on the settlement statement, like:
You didn't borrow the funds used to pay the points. You can't claim this deduction if the lender withheld the amount of the points from the loan proceeds.
You used the mortgage to purchase or build your main home.
The settlement statement -- usually a HUD-1 -- clearly states the amount of points paid in connection with the closing.
The points are as a percentage of the amount of the mortgage's principal.
If you don't meet any of these conditions, you must deduct points over the life of the loan. To see if you can fully deduct points you paid in the year you paid them, see the flowchart in the Interest Expense chapter of IRS Publication 17: Your Federal Income Tax.
You can still deduct the points over the life of the loan even if both of these apply:
You qualify to deduct all points in the year you paid them.
You don't benefit from itemizing deductions for the mortgage’s first year.
Ex: Avery bought his first home in November 2012, and he’s filing as head of household. He paid 3 points ($3,000) to get a 30-year $100,000 mortgage, and he made his first mortgage payment on Jan. 1, 2013. For 2012, his itemizeddeductions, including points paid, total only $3,700, which is less than his standard deduction. Since his standard deduction is more than his itemized deductions, he should deduct his points over the life of the mortgage loan.
Deducting Points Over the Life of the Loan
You must deduct points over the life of a loan if either applies:
You paid points to refinance a home mortgage, which is also known as a “re-fi.”
The points are for a second home you bought.
You can fully deduct the part of the points for the improvement in the year you paid them with your own funds if both of these apply:
You use part of the refinanced mortgage proceeds to improve your main home.
You meet the first 6 points under “Deducting Points in the Year Paid” above.
You can deduct the rest of the points over the life of the loan.
You must usually amortize points deducted over the life of the loan using the original issue discount (OID) rules. Since OID rules are complex, you can use a simplified method. You can deduct the points equally over the life of the loan if you meet these conditions:
You use the cash method of accounting. Most individuals use this method.
You secured the loan with your home.
The loan's length isn't more than 30 years. (For loans of more than 10 years, the loan's terms must be the same as other loans offered in your area for the same or longer period.)
The loan amount is $250,000 or less.
You paid no more than 4 points for a loan of 15 years or less. Or you paid no more than 6 points for a loan longer than 15 years.
Ex: Devin bought his first home in November 2012, and he paid 3 points ($3,000) for a 30-year (360 months) $100,000 mortgage. He made his first mortgage payment in December 2012. To deduct points equally over the life of the loan, he would calculate it as:
For 2012, he can deduct only 1 month's worth of points, or $8.33.
Each year from 2013 through 2042, he can deduct $100 of his points:
$3,000 (points paid) ÷ 360 (monthly payments) x 12 (payments per year) = $100
In 2042, he can deduct only 11 months' worth of points, or $92.
Loan Ends Early
If you're deducting points over the loan’s life and you pay the mortgage off early, you can deduct the remaining points in the year you pay off the mortgage.
However, you might not be able to do this if you refinance your mortgage. If you refinance with a new lender, you can deduct the remaining points on the original loan when you pay off the loan. However, if you refinance the mortgage with the same lender, you must deduct the remaining points over the life of the new loan.
Ex: Brandon refinanced his original home mortgage in 2012. The original 30-year loan, which he took out in July 2003, was for $125,000. He paid 2 1 / 2 points ($3,125) for the loan:
$125,000 (mortgage amount) x .025 (points paid) = $3,125
He made his first payment on Sept. 1, 2004, and he’s been deducting points over the life of loan. From September 2004 through December 2009 (64 months), he deducted $556:
So, his 2012 deduction for points paid on his old loan would be $146:
($8.68 X 2) + ($14.31 X 9) = $146
And his total 2012 deduction for points paid for the old and new loans would be $256:
$146 (old loan) + $110 (new loan) = $256
If you claim a deduction for points paid, it’s in addition to the deduction for the normal monthly interest payments you made on both loans.
Points the seller pays for the buyer’s loan are usually considered to be paid by the buyer. So, the buyer can deduct them. When you deduct points paid by the seller, you must subtract the amount of points the seller paid from your home’s basis.
Reporting Home Mortgage Interest on Schedule A
If you paid $600 or more in mortgage interest, your lender must send you and the IRS a Form 1098. However, if your mortgage interest totals less than $600 , your lender isn’t required to send you this form.
On Form 1098:
Box 1 shows the interest you paid, not including points.
Box 2 shows points you might be able to deduct. You usually see an amount in this box only if this is the mortgage you took out when you bought the home.
Box 3 shows a refund of interest made if you overpaid the amount you owed.
Box 4 can contain various information, like:
Address of home being mortgaged
Amounts paid out of escrow for real-estate taxes and homeowner's insurance premiums
You enter deductible interest (box 1) and points (box 2) reported on Form 1098, on Schedule A, line 10. You might be able to deduct the Form 1098 amounts if they meet the guidelines discussed earlier.
Enter these amounts on Schedule A:
On line 11 -- Deductible mortgage interest you paid that wasn't reported on Form 1098
On line 12 -- Points not reported to you on Form 1098
If the recipient of the interest is an individual, enter on the dotted lines below line 11 the recipient's:
Identifying number, usually the Social Security number (SSN)
Deduct mortgage interest on rental property as an expense of renting the property. This mortgage interest is reported on Schedule E, not Schedule A. Also, if you paid points when you took out the mortgage on your rental property, you can’t deduct the points in the year paid. You must amortize the points over the life of the loan.
Personal and Rental Use of Same Property
You must prorate property expenses if both of these apply:
You personally use part of your property.
You rent out another part of your property that you don't personally use.
Prorate expenses that apply to the entire property based on the percentage of space rented. These prorated expenses include mortgage interest and real-estate taxes.
You can only deduct the rental portion of expenses from rental income. If you itemize, you can use Schedule A to deduct the personal portion of:
You can't deduct the personal portion of other expenses, like utilities.
To learn more, see the Rentals and Royalties tax tip.
If you didn’t rent out your vacation home, you can fully deduct the mortgage interest on the vacation home. Use Schedule A to deduct the interest.
If you personally used the vacation home and rented it out for fewer than 15 days:
You don't need to report the rental income.
You can deduct the mortgage interest you paid.
If you rented out the home for 15 days or more:
You must report the rental income
You can deduct expenses related to renting the property.
Report the mortgage interest for the time you rented out the property on Schedule E. Deduct the remainder of the mortgage interest you paid as a deduction on Schedule A. The split is based on a ratio between the number of days rented and either of these:
Number of days you owned the home during the year
Number of days you used the home for personal purposes
To learn more, see Personal Use of Vacation Homes in the Rentals and Royalties tax tip.