Homeowners who bought a home in Albuquerque after December 15, 2017 can deduct interest paid on the first $750,000 of their mortgage when itemizing their tax return. Other homeowners can deduct interest on the first $1 million of mortgage debt.
The following is a guide to what to know about the mortgage interest deduction and how it works.
The mortgage interest deduction allows homeowners to reduce their taxable income by the amount paid in mortgage interest over the year. Homeowners with a mortgage can lower their tax bill if they keep records of interest paid. In general, interest on the first $1 million of a mortgage for a primary or secondary residence can be deducted. However, for homes purchased after December 15, 2017, the deduction applies only to the first $750,000 of mortgage debt.
If you’re deducting mortgage interest for your primary home, typically, the following will count:
- Your property can be a mobile home, house, apartment, condo, co-op, house trailer, or even a houseboat
- Your home has to be the loan’s collateral.
- The home needs to have sleeping, toilet, and cooking facilities.
- If you get a housing allowance from the military or through the ministry that’s not taxable, you can still deduct the interest for a mortgage.
- A mortgage you get to buy out the other half of your home in a divorce also counts.
If you have a mortgage on a second home, the following will qualify you:
- You don’t need to use the home throughout the year
- The house has to be the loan’s collateral
- If you rent out your second home, you need to be there for the longer of at least 14 days or over 10% of the number of days you rented it out
Points are prepaid interest you can get on a loan. You can deduct your points gradually through the life of your loan, or if you meet certain requirements, you can deduct them at the same time. The eight requirements you have to meet to deduct your points all at once include:
- The mortgage has to be for your primary home
- It’s an established practice to pay points in your area
- Your points can’t be abnormally high
- Your points aren’t for closing costs
- The down payment you make is higher than your points
- The points are calculated as a percentage of your loan
- The points are on your settlement statement
- You use a cash method of accounting on your taxes
If you paid a late fee that was not for a specific service related to your mortgage loan, you can deduct it. You can also deduct any prepayment penalty you incurred for paying your mortgage early as interest.
If you take out a home equity loan and use the money to buy, substantially renovate, or construct a home, the interest is tax deductible. However, if you use the loan for expenses unrelated to your home, the interest cannot be deducted.
What’s Not Deductible?
Most extra principal payments on your mortgage, homeowners’ insurance, title insurance, and settlement costs are not deductible. Down payments, earnest money, deposits you forfeit, and interest on reverse mortgages are also non-deductible.
To claim a mortgage interest deduction, first look for Form 1098, which your lender will send in January or early February. This form details your total mortgage interest and points paid for the year, and your lender also sends a copy to the IRS. You will receive a Form 1098 if you paid at least $600 in mortgage interest, including points, during the tax year.
When you file your taxes, itemizing deductions is necessary if you want to claim more than the standard deduction.
Itemizing your taxes takes more time, but if your standard deduction is less than your total itemized deductions, you should itemize to lower your tax bill. Use Schedule A to calculate your itemized deductions. Tax software can also guide you through the itemization process.
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