Mortgage Interest Deduction

Definition

A Mortgage Interest Deduction is a common itemized deduction that allows homeowners to deduct interest paid on a loan secured by their primary or secondary homes. The loan can be for purchasing, constructing, or improving the property. The deduction helps reduce the taxable income of homeowners, making home ownership more affordable by providing a significant tax break.

Examples

First-Time Homebuyer: Sarah purchases her first home and takes a mortgage of $300,000 with a 4% interest rate. At the end of the year, she has paid $12,000 in mortgage interest. She can deduct this $12,000 from her taxable income if she itemizes her deductions, reducing her overall tax liability.
Home Improvement: John quips a $100,000 mortgage to renovate his second home. In the first year, he pays $5,000 in interest. This $5,000 can also be deducted from his taxable income, as it qualifies under the mortgage interest deduction rules.
High-Value Property: Linda & Mark have a mortgage of $800,000 on their primary residence. Due to the limitations in tax laws, they can only deduct interest on the first $750,000 of mortgage principal. If they pay $40,000 in interest, a part of this deduction may be limited based on current IRS guidelines.

Frequently Asked Questions

Can I deduct interest on a personal loan used to purchase my home?

No, only the interest on loans secured by the home—typically through a mortgage or home equity line of credit—are deductible.

Is mortgage interest on rental properties deductible?

Yes, but it’s considered a business expense, not a personal itemized deduction.

What happens if the mortgage is above the IRS limit?

You can only deduct the interest paid on loan amounts up to $750,000 (or $1 million for mortgages taken before December 16, 2017).

Can I claim the mortgage interest deduction if I take the standard deduction?

No, the mortgage interest deduction is an itemized deduction. You can only claim it if you itemize your deductions instead of taking the standard deduction.

How do I claim the mortgage interest deduction?

You’ll need to itemize your tax return using IRS Form 1040 and report the amount on Schedule A. The mortgage lender typically provides Form 1098, which states the interest paid.

Itemized Deductions: Deductions from Adjusted Gross Income which include mortgage interest, property taxes, medical expenses, etc.
Home Equity Loan: A loan secured by your home which can also qualify for the mortgage interest deduction if used for home improvements.
Standard Deduction: A fixed dollar amount that reduces the income you’re taxed on but forgoes specific individual deductions.
Adjusted Gross Income (AGI): Your gross income minus adjustments to income, used to determine taxable income.

Online Resources

References

Internal Revenue Service. “Publication 936 (2020), Home Mortgage Interest Deduction.” IRS.gov.
Investopedia. “What is the Mortgage Interest Deduction?” Investopedia.com.

Suggested Books for Further Studies

“Home Buying for Dummies” by Eric Tyson and Ray Brown
“J.K. Lasser’s Your Income Tax” by J.K. Lasser Institute
“The Complete Guide to Real Estate Finance for Investment Properties” by Steve Berges

Real Estate Basics: Mortgage Interest Deduction Fundamentals Quiz

### Is the interest on a personal loan used to finance a home purchase deductible? - [ ] Yes, all loan interest is deductible. - [ ] No, personal loan interest is deductible. - [x] No, only mortgage interest is deductible. - [ ] Yes, if the home is used as the primary residence. > **Explanation:** Only the interest on loans secured by the home, such as a mortgage or home equity line of credit, is deductible. Personal loan interest used to finance home purchases does not qualify. ### What form is typically used to report the mortgage interest paid? - [ ] Form 1040 EZ - [ ] Form 1099 - [x] Form 1098 - [ ] Form W-2 > **Explanation:** Lenders provide Form 1098, which details the amount of mortgage interest paid by the borrower, that is needed to claim the deduction. ### To claim the mortgage interest deduction, what must you do? - [ ] Choose the standard deduction - [x] Itemize deductions - [ ] Report it as business expense - [ ] Only have one mortgage > **Explanation:** To claim the mortgage interest deduction, taxpayers must itemize their deductions using Schedule A, not take the standard deduction. ### On how much mortgage principal is the interest deductible for mortgages taken after December 15, 2017? - [ ] $1,000,000 - [ ] $500,000 - [ ] $900,000 - [x] $750,000 > **Explanation:** For mortgages taken after December 15, 2017, the mortgage interest is deductible only on the first $750,000 of mortgage principal. ### Can the mortgage interest deduction be claimed on a second home? - [x] Yes, it can - [ ] No, it only applies to primary homes - [ ] Only if both homes are in the same state - [ ] No, second homes do not qualify > **Explanation:** The mortgage interest deduction can also be claimed on a second home, within the specified limits on the mortgage principal amount. ### How often can homeowners claim the mortgage interest deduction? - [x] Annually - [ ] Monthly - [ ] Bi-Annually - [ ] Per every mortgage payment > **Explanation:** Homeowners can claim the mortgage interest deduction on an annual basis, when filing their tax returns. ### Which type of property’s mortgage interest cannot be deducted? - [ ] Primary residence - [ ] Secondary residence - [x] Investment property - [ ] Home under renovation > **Explanation:** Mortgage interest on investment properties can be deducted as a business expense, not as a personal itemized deduction typically claimed for primary or secondary residences. ### What must you receive from your lender to claim a mortgage interest deduction? - [ ] Mortgage bill statement - [ ] Form 1099 - [x] Form 1098 - [ ] Property deed > **Explanation:** Taxpayers must receive Form 1098 from their lender, which details the mortgage interest paid, to claim the deduction. ### Do you save more tax dollars by taking the standard deduction or itemizing deductions including mortgage interest? - [x] It depends on individual circumstances - [ ] Always itemizing including mortgage interest - [ ] Always taking the standard deduction - [ ] Neither has an impact on tax dollars saved > **Explanation:** Whether to take the standard deduction or itemize, including the mortgage interest deduction depends on individual financial circumstances to maximize tax savings. ### Where on IRS Form 1040 is the mortgage interest deduction reported? - [ ] On the cover page - [ ] Under wages - [x] On Schedule A - [ ] On Schedule C > **Explanation:** The mortgage interest deduction is reported on Schedule A of IRS Form 1040, where itemized deductions are detailed.