Becoming a homeowner isn’t just the American dream for some. It can also come with tax benefits, one being the mortgage interest deduction. However, not all homeowners can claim this tax deduction, and the rules can be complex. For example, how much you can deduct might depend on when you bought your home and your filing status. Additionally, deducting mortgage interest isn't the right choice for everyone.
Since tax season has started, here’s what you should know about claiming the mortgage interest deduction on your federal income tax return.
How does mortgage interest deduction work?
The mortgage interest deduction allows homeowners to deduct the interest they pay on their home mortgage from their taxable income. This can help homeowners lower tax bills by reducing their taxable income.
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However, taxpayers can only deduct mortgage interest if they itemize deductions. This means you cannot claim the standard deduction and deduct mortgage interest in the same tax year.
Is it worth itemizing to deduct mortgage interest? It wouldn’t make sense to take the mortgage interest deduction if your total itemized deductions (which can include mortgage interest, charitable contributions, state and local income taxes etc.) are less than the 2023 standard deduction for your filing status.
- For 2023, the standard deduction is $13,850 for married filing separately and single filers.
- Head of household filers have a standard deduction of $20,800 for the 2023 tax year.
- If you are married and filing jointly or file as a qualifying widow(er), your 2023 standard deduction jumps to $27,700.
Mortgage interest deduction limit 2023
As stated earlier, your mortgage interest deduction limit depends on when you purchased your home and your filing status.
- If you purchased your home before Dec. 16, 2017 and are a single or joint filer, you can deduct interest paid on the first $1 million of your mortgage.
- If you are married and filing separately, your allowable mortgage interest deduction is limited to interest paid on the first $500,000, even if you purchased the home prior to Dec. 16, 2017.
- For homes purchased after the above date, the allowable mortgage interest tax deduction drops to interest paid on the first $750,000 for single and joint filers and to $375,000 for married couples filing separately.
(Note: If you purchased your home after Dec. 15, 2017, you might qualify for an exception. According to the IRS, a taxpayer who “enters into 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”.)
What mortgage interest is tax deductible?
To take the mortgage interest deduction, the interest paid must be on a “qualified home.” Your first and second home may be considered qualified homes, but there are some exceptions.
- If you rent out your second home, the home only qualifies if you use it “more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer.”
- If you have more than one second home, you can only use one of them as a qualifying second home during the tax year.
- If you have a home office in your home, your property can still be considered a qualified home. However, you must allocate the use of your home.
- A home under construction cannot be considered a qualifying home unless it becomes a qualifying home when it is ready for occupancy.
- A home under construction cannot be considered a qualifying home for a period longer than 24 months.
- If you rent out a portion of your home, the home won’t qualify if you rent to more than two tenants during the tax year or rent an area of the home that has its own sleeping, cooking, and toilet facilities.
(Note: Multiple tenants who share the same sleeping quarters are considered one tenant by the IRS.)
Writing off mortgage interest
You may be able to deduct more than just the interest paid on your qualifying first and second home. Here are some other expenses that may be tax-deductible:
- Late payment fees
- Prepayment penalties (if you incur an additional expense for paying off your mortgage early)
- Interest on a home equity line of credit (HELOC) that was used to improve a qualifying home.
- Points paid (may be referred to as loan origination fees, maximum loan charges, loan discount, or discount points)
Not all points are fully deductible. The IRS provides a flowchart that can help you determine whether or not your mortgage points are fully deductible for the 2023 tax year.
What costs don’t qualify as mortgage interest? Costs that you can’t claim as a mortgage interest tax deduction include homeowners insurance, mortgage insurance premiums, and title insurance. Here are some other expenses that are not tax-deductible.
- Unpaid interest on a reverse mortgage
- Down payments
- Closing costs
- Appraisal and notary fees
- Closing costs
- Interest on HELOC loans where funds were not used to improve your qualifying property
How to claim the IRS mortgage interest deduction
If you paid more than $600 in mortgage interest last year, keep an eye out for a Form 1098 from your mortgage lender in the coming weeks, (early 2024). A copy of this form will also be sent to the IRS. In most cases, homeowners can report the amount on this form on line 8a of Schedule A (Form 1040). However, the allowable deduction amount may differ in certain circumstances, such as if the property isn’t considered a qualified home.
Remember that you’ll need to itemize your deductions if you choose to take the mortgage interest tax deduction. This can make preparing your taxes more complex than if you take the standard deduction, so you might find it helpful to work with a tax professional to make the process easier.
For more information about claiming the mortgage interest tax deduction, see IRS Publication 936.
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