If you own a home, one of your first questions may revolve around how your home affects your tax filing. While there have been some changes in recent years, come tax time, it’s important to know exactly what qualifies as a deduction (and to consult with your tax advisor) so you can get the most out of your tax write-offs.*
A mortgage interest deduction is an itemized tax deduction that allows homeowners to deduct the interest paid on a loan used to buy, build, or improve a first or second home. Homeowners who purchased a home prior to December 15, 2017 can deduct interest on the first $1,000,000 of mortgage debt. For those who purchased a home after December 15, 2017, a deduction only applies to the first $750,000 of mortgage debt.
There are many nuances to the mortgage interest deduction, so make sure you keep good records of the interest you’ve paid throughout the year. Here’s a look at some things to watch out for and know as you’re evaluating your deductions.
The type of mortgage in question (i.e., a first mortgage, second mortgage, or a Home Equity Loan) and what type of property it covers, such as your primary residence versus a rental or investment property, can affect how your mortgage interest deduction works, so you’ll want to know how it relates to your specific case this year. For a complete list of rules and regulations, make sure to check out IRS Publication 936. Here is a brief overview of a few common scenarios below.
In order to deduct the mortgage interest on your home, you must meet a few qualifications. First of all, the home must be a house, apartment, condo, co-op, houseboat, mobile home, or trailer, and it must have sleeping, cooking, and bathroom facilities. The home itself must be collateral for a mortgage loan.
If you receive a nontaxable housing allowance via the military or because you’ve done ministry work, you can still deduct interest. If you have taken out another mortgage to buy out a partner in a divorce as part of a mortgage buyout, you can also deduct the interest on that mortgage.
You can deduct mortgage interest on your second home, but in order to do so, there are a few rules. You don’t have to use the home during the year, but the home must be collateral for a loan. Also, if you rent out the home and receive rental income on the property, you must be in the house for more than 14 days or more than 10% of the days the home is rented, whichever is longer.
If you paid points on your mortgage loan as a way to pay down the amount of your loan interest, you can deduct these either all at once, or over the course of the loan, but there are a few requirements. The loan must be for your primary home, and paying discount points must be a regular practice where you live.
Also be aware of the interest rates on the points, and note that they can’t have also been used for closing costs. Your down payment must be higher than your points, and the points must be calculated as a percentage of the loan.
The interest on your home equity loan is only deductible if you are using the loan to make significant repairs to your property. If you are using the loan for another purpose — a large purchase, paying down debt, etc. — it is not deductible.
If you’re late making a mortgage payment and are charged a late fee, this additional cost counts as part of the mortgage interest deduction.
For some lenders, paying off your loan early can result in a prepayment penalty (not however, when you have a loan with PennyMac) because lenders want to ensure they’re getting interest income. If you are charged a prepayment penalty for any reason, you are allowed to deduct this as part of your mortgage interest deduction.
Not all extra costs associated with a mortgage are deductible. Here’s a look at what doesn’t qualify.
Getting ready to prepare your taxes and want to make sure you’re taking full advantage of your mortgage interest deduction this year? It’s important to make sure all your paperwork is in order and follow these steps to take full advantage of the deduction.
This form shows how much you paid in mortgage interest and any points for the tax year. Your lender will send you the form if you paid $600 or more in mortgage interest, and they will also send a copy to the IRS to match up with your return. This form may also show you the amount of interest you’ve paid on your home loan to date. Can’t find it or not sure if you received it at all? Just contact your lender, and they can provide you with the amount of mortgage interest you paid for the year.
If you want to take advantage of the mortgage interest deduction, you’ll need to itemize your deductions instead of using the standard deduction. Make sure it makes sense to itemize your deductions, as the goal is to take the highest possible deduction available to you.
There are some scenarios where you can still claim the deduction even if your situation doesn’t fit the standard requirements exactly. Just make sure you’re keeping extremely accurate records of all of your property costs throughout the year, as well as square footage used for spaces like rentals and home offices, as things can get even more complicated. Here are some cases that would allow you to still claim the deduction.
The 2018 U.S. tax bill made significant changes to the mortgage interest tax deduction, as well as other updates for homeowners.
The mortgage interest deduction allows homeowners to deduct part of the cost of their mortgage on their taxes. The 2018 tax plan now limits the portion of a mortgage on which you can deduct interest to $750,000, as compared to the previous limit of $1 million. Homeowners with mortgages that existed prior to the bill’s passage can continue to receive the current deduction.
When looking at the 2018 tax changes, the focus was typically on the mortgage interest deduction changes. The bill has another aspect that affects homeowners: With the changes in property tax deductions, the 2018 tax plan has a limit of $10,000 on the amount of state and local property taxes that can be deducted from a homeowner’s federal taxes.
Whether you already own a home or are taking your very first steps towards making a smart investment in a home to call your own, be sure to stay in the know about all the potential tax advantages, along with the many other benefits of homeownership.
*Consult a tax adviser for further information regarding the deductibility of interest and charges.