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Is mortgage interest tax deductible?

Yes, it is possible to get a home loan interest tax deduction on your taxes. However, there are tax rules that apply, and each homeowner’s unique situation will determine if a mortgage interest tax deduction can be taken.

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Read on to learn more about deducting mortgage interest and the maximum mortgage interest tax deduction.

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What is the mortgage interest tax deduction?

According to the IRS, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home or a second mortgage. In most cases, you can deduct all your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.
 
Deducting mortgage interest and home loan interest tax deduction depends on many factors including your mortgage, type of property, and conditions set by the IRS.


How much mortgage interest can I deduct in 2022?

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($500,000 if married filing separately) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.


Which loans qualify for a mortgage interest deduction?

The three categories of mortgages that qualify are:
  1. Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
  2. Mortgages you (or your spouse if married filing a joint return) took out after October 13, 1987, and prior to December 16, 2017 (see binding contract exception below), to buy, build, or substantially improve your home (called home acquisition debt), but only if throughout 2021 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
    • Exception. ‚Äč A taxpayer who enters a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, is considered to have incurred the home acquisition debt prior to December 16, 2017. 
  3. Mortgages you (or your spouse if married filing a joint return) took out after December 15, 2017, to buy, build, or substantially improve your home (called home acquisition debt), but only if throughout 2021 these mortgages plus any grandfathered debt totaled $750,000 or less ($375,000 or less if married filing separately).
See IRS Publication 936 or talk to a tax professional to see if your mortgage interest is deductible.


Claiming the mortgage interest deduction

1. Choose your deduction

Taxpayers have two options when completing a tax return, take the standard deduction or itemize their deductions. Most taxpayers use the option that gives them the lowest overall tax. Choose your deduction, based on the IRS criteria:
 
Standard deduction: The standard deduction amount depends on the taxpayer's filing status, whether they are 65 or older or blind, and whether another taxpayer can claim them as a dependent. Taxpayers who are age 65 or older on the last day of the year and don't itemize deductions are entitled to a higher standard deduction. Most filers who use Form 1040 can find their standard deduction on the first page of the form.
 
Itemized deduction: Taxpayers choose to itemize deductions by filing Schedule A, Form 1040, Itemized Deductions. Itemized deductions that taxpayers may claim include:
  • State and local income or sales taxes
  • Real estate and personal property taxes
  • Home mortgage interest
  • Mortgage insurance premiums on a home mortgage
2. Obtain your 1098 form. If you paid more than $600 in mortgage interest during a particular year, your lender will send you a 1098 form stating the amount of interest you paid. This amount will need to be reported to the IRS.
 
3. Choose the proper tax forms. A certified public accountant (CPA) or other tax professional can help you determine which forms you need to complete. However, if you are specifically looking to deduct your mortgage insurance, you will need to do an itemized deduction by filing Schedule A, Form 1040, Itemized Deductions.
 

4. See if you qualify for special deduction rules.

Certain items can be included as home mortgage interest and others that can't. Here are a few to be aware of:
 
  • Late payment charge on mortgage payment.You can deduct a late payment charge as home mortgage interest if it wasn't for a specific service performed in connection with your mortgage loan.
  • Mortgage prepayment penalty.If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.
  • Sale of home. If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.
  • Prepaid interest.If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception that applies to points, discussed later.
  • Mortgage interest credit.You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. See IRS Form 8396 and Pub. 530 for more information on the mortgage interest credit.
  • Ministers' and military housing allowance.If you're a minister or a member of the uniformed services and receive a housing allowance that isn't taxable, you can still deduct your home mortgage interest.
For more Special Situation categories see IRS Publication 936.


Mortgage deduction eligibility

  1. Interest on the mortgage for your main home. For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home.
  2. Interest on the mortgage for a second home. A second home is a home that you choose to treat as your second home.
    • Second home not rented out. If you have a second home that you don’t hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You don't have to use the home during the year.
    • Second home rented out. If you have a second home and rent it out part of the year, you must also use it as a home during the year for it to be a qualified home.
  3. Mortgage points you have paid. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. You generally can't deduct the full amount of points in the year paid. Because they are prepaid interest, you generally deduct them over the life (term) of the mortgage.
  4. Late payment charges on your mortgage. You can deduct a late payment charge as home mortgage interest if it wasn't for a specific service performed in connection with your mortgage loan.
  5. Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.
  6. Interest on a home equity loan. According to the IRS, interest paid on home equity loans and lines of credit is deductible when you use the proceeds to buy, build, or substantially improve your home that secures the loan.
  7. Interest on a home equity line of credit (HELOC). HELOC interest is tax deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
  8. Interest paid before selling your home. If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.
  9. Mortgage insurance premiums. The itemized deduction for mortgage insurance premiums was extended through 2021 but has not yet been extended through 2022. The final decision will be made by the federal government.


What's not deductible?

  • Homeowner's insurance
  • Closing costs
  • Moving expenses
  • Down payments
  • Forfeited earnest money deposits
  • Interest accrued on a reverse mortgage
  • Rental payments before home purchase was finalized
  • Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance.
  • The cost of utilities, such as gas, electricity, or water.
  • Homeowners association fees, condominium association fees, or common charges.
 


Additional Deduction Scenarios

  • Divorced or separated individuals.If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony.
  • Rental property. You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.
  • Reverse mortgages. A reverse mortgage is a loan where the lender pays you while you continue to live in your home. Depending on the plan, your reverse mortgage becomes due with interest, when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive isn't taxable.
  • Cooperative housing. A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Generally, if you're a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land.


Why is some mortgage interest not tax deductible? 

The United States Federal Government determines the criteria and qualifying standards for tax deductions. These determinations are typically made based on economic factors and conditions.


What other tax deductions are available to homeowners?

These are some additional tax deductions homeowners may qualify for:

Property taxes. These are state and local governments charged as an annual tax on the value of real property. You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community.
  • Capital gain taxes. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.
  • Minister or military housing allowance. If you are a minister or a member of the uniformed services and receive a housing allowance that isn’t taxable, you can still deduct your real estate taxes and your home mortgage interest.
  • Homeowners Assistance Fund. There is an optional method for determining your mortgage interest and state and local real property tax deduction if you received assistance from a state or an entity of a state that was funded from amounts from the Homeowners Assistance Fund.
More details can be found in IRS Publication 530, Tax Information for Homeowners.


Can you deduct mortgage interest after refinancing?

Yes. The same rules would apply as before you refinanced, and you will receive a form 1098 from your lender for the portion of the year you held your original mortgage. If you have refinanced with a different lender, the new lender will send you a form 1098 for the mortgage interest you paid after refinancing.
 
Any points you pay to refinance a mortgage aren't deductible in full in the year you pay them. However, if you use part of the refinanced mortgage proceeds to substantially improve your main home and you meet the first six tests listed under Deduction Allowed in Year Paid, earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.


Is the mortgage tax deduction worth it?

If a mortgage interest tax deduction applies to your situation, your tax professional can help you determine your maximum mortgage interest tax deduction and how much money you could get in a tax refund. Getting a refund is always worth it if you qualify.
 
However, if you are trying to decide between paying off your mortgage or not, you’ll save more money in interest by paying off your mortgage. This savings over the long term will likely be more than you’d get from a tax refund on any mortgage interest you pay.


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For over 60 years CU SoCal has been providing financial services, including car loans, mortgages, Home Equity Loans, HELOCs, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
 
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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