How Do You Know If Your Mortgage Interest Is Tax Deductible?
Is your favorite season summer, or maybe winter? What about tax season? We know there’s usually a collective groan at the mere mention of taxes, but they don’t have to be something on your to-do list that you dread.
As a homeowner, you most likely qualify for a deduction on the interest you pay on your mortgage. So, how do these deductions work?
Per the IRS, tax deductions are expenses that can reduce your income, which lowers the amount you owe in taxes at the end of the year. The interest you pay on a mortgage loan is considered a tax deduction, which means you can get money back based on what you paid in interest.
There are two types of deductions 𑁋 standard and itemized.
- Standard deductions are single deductions at a fixed amount.
- Itemized deductions are variable deductions taken on multiple expenses.
Essentially, the primary borrower of a mortgage is able to deduct the interest they’ve paid each year if their loan meets the IRS’ requirements. You are considered to be the primary borrower if you are the one who has taken on the debt of the mortgage loan and are the sole person making payments. If you are married and you and your spouse signed for the loan together, you are both primary borrowers. With this information in mind, let’s take a look at what the IRS requires for your mortgage to be eligible for tax deductions.
Loan Requirements for Deductible Mortgage Interest
Mortgage payments are not always eligible for interest deduction come tax season. The loan has to be a home loan, and the money you receive through your loan has to be used to buy, build, or improve your home.
TurboTax outlines deductible mortgage interest eligibility as follows: “For tax years prior to 2018, the maximum amount of debt eligible for the deduction was $1 million. Beginning in 2018, the maximum amount of debt is limited to $750,000. Mortgages that existed as of December 14, 2017 will continue to receive the same tax treatment as under the old rules. Additionally, for tax years prior to 2018, the interest paid on up to $100,000 of home equity debt was also deductible. These loans include:
- A mortgage to buy your home
- A second mortgage
- A line of credit
- A home equity loan”
If you're wondering what constitutes a home according to the IRS, here's a graphic:
Based on these requirements, do you think you’re eligible for deductible mortgage interest? Check out this mortgage tax deduction calculator to get an idea of what your deduction could be!
Taking on a mortgage is beneficial not only to build equity but also to score a tax deduction on the interest you’ve paid. After all, who doesn’t want to turn one of their biggest investments into their biggest tax break?
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