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Mortgage Interest Deduction: Overview & How It Works

July 17, 2024

Utilizing tax deductions during the tax season can save you on your upcoming tax bill. If you incurred a mortgage debt after December 16, 2017, the IRS allows homeowners to claim a mortgage interest deduction on the first $750,000 of their indebtedness (or the first $375,000 if you are married and filing your taxes separately). If you obtained your mortgage before that date, higher limits ($1 million or $500, 000 if married and filing separately) may apply.

Key Takeaways

Homeowners can use a home mortgage interest deduction on the first $750,000 of their debt.
To qualify for this deduction, your mortgage must be a secured debt from a qualified lender.
The mortgage must be for your main home or your second home to be eligible for a deduction.
Current deductions have a mortgage interest deduction income limit of interest paid on the first $750,000 of your debt (or the first $375,000 if you are married and filing separately.)
To claim a mortgage interest deduction, you have to itemize your deductions on Schedule A (Form 1040) rather than using a standard deduction.
Costs related to your mortgage interest points may also be deductible.

Table of Contents

What is Mortgage Interest Deduction?
Mortgage Interest Deduction Limit
How Does Mortgage Interest Deduction Work?
What Qualifies as Mortgage Interest Tax Deduction?
What is Not Deductible as Mortgage Interest Tax Deduction?
How To Claim the Mortgage Interest Tax Deduction?
Save Time and Money on Tax Prep with Freshbooks
Frequently Asked Questions

What Is Mortgage Interest Deduction?

The mortgage interest deduction allows taxpayers who have secured a mortgage for a primary or secondary residence to claim a deduction on the interest paid on their mortgage.

The amount of tax deduction for mortgage interest depends on the date you secured the mortgage, the amount of the mortgage, and how you have used the mortgage money. To qualify, your mortgage must be a secured debt from a qualified lender like a bank, the property must be your home (or your second home), and you must intend to pay it in full.

Mortgage Interest Deduction Limit

In 2017, the mortgage interest tax deduction limit was set to a maximum amount of $750,000 (or $375,000 if you are married and filing separately.) This includes any money taken out to purchase, build, or improve a qualified home. It also includes refinancing debt, but only up to the amount of the balance of the old mortgage principal before refinancing.

Some exceptions apply, and older debts are grandfathered in, including any mortgages taken out before October 12, 1987, and any mortgages taken out between October 13, 1987, and December 16, 2017, if the total debt is $1 million or less.

To find out more about how FreshBooks makes tax deductions and tax preparation easier, please check out the helpful video below.

How Does Mortgage Interest Deduction Work?

Although purchasing a home is a big expense, utilizing the mortgage deduction can lower your tax bill, giving you some relief.

To take advantage of this tax break, you have to itemize your deductions on Schedule A (Form 1040) instead of claiming the standard deduction. To make this process easier, lenders issue Form 1098 after the homeowner has paid $600 or more in interest during the tax year. The form is also sent to the IRS.

In 2023, you can only deduct the amount of the interest you paid on the first $750,000 of your mortgage, and only if the financing was put directly toward the purchase, building, or improvement of a home being used as collateral.

Please see the following mortgage interest deduction examples for clarity:

If a person secures a mortgage of $500,000 in 2023 to purchase a home that is to be used as their secondary residence, they can deduct all of the interest payments they make throughout the year using a mortgage interest itemized deduction.

If a person purchased their primary home in 2021 with a mortgage for $800,000, they may only deduct interest payments made on the first $750,000 of the loan.

If a person received a mortgage for $1 million in 1985 to purchase their home, they can subtract all mortgage interest paid every year.

What Qualifies As Mortgage Interest Tax Deduction?

Figuring out what you can and cannot deduct from your taxes may seem complicated, but this list will help you decide what to write on your itemized 1040 form.

1. Interest on the Mortgage for Your Main Home

Your main home is the place where you live most of the time or your primary residence. You can deduct interest paid on up to the $750,000 home acquisition limit. If your home is divided into a living space and a home office, you can only claim the interest paid on parts of your home used for residential living. The portion of mortgage interest paid on your home office may be deducted as an expense for business use of your home (Form 8829), subject to several requirements.

2. Interest on the Mortgage for a Second Home

To use your second home’s interest as a tax deduction, it must either not be rented out, or rented out some of the time but still used by you as a home for more than 14 days, or more than 10% of the number of days during the year that it is rented out, whichever is longer. If you do not use the home enough, it will be considered a rental property, and not a second home.

If you own more than 2 homes, you must only choose one as your “second” home.

3. Mortgage Points You Have Paid

The term “points” is used to describe charges that have been paid, or are treated as paid, by a borrower to be able to obtain their home mortgage. This could include a home equity loan, a line of credit, or a credit card loan, as long as it is used to buy, build, or substantially improve your home.

These points act as prepaid interest, and, generally, cannot all be deducted in the year they were paid, but rather be deducted ratably over the term of the mortgage.

There is an exclusion to this general rule that allows a homeowner to deduct all points in the year paid, however, they must meet nine different requirements to qualify.

The IRS lists some other common terms for “points” including loan origination fees, maximum loan charges, loan discounts, or discount points.

4. Late Payment Charges on Your Mortgage

If you are late on a mortgage payment, you can deduct late payment fees charged to you on your mortgage. This tax credit only applies if it was not for a specific service performed in connection with your mortgage loan, or a cost that was incurred in connection to your loan.

5. Prepayment Penalties

If you pay your mortgage off early, you may be charged a penalty fee. This can be deducted from your taxes.

6. Interest on a Home Equity Loan

If you take out a home equity loan or home equity line of credit (HELOC) for a renovation project or home improvement of any kind that upgrades your property, you can deduct the interest on that loan as well.

7. Interest Paid Before Selling Your Home

When you sell your home, you can deduct the home mortgage payments of interest you made up to (but not including) the date of sale.

What Is Not Deductible As Mortgage Interest Tax Deduction?

While many costs related to mortgages and home financing are tax deductible, many are not. The following is a list of items that are not considered to be allowable deductions:

1. Homeowners Insurance

The only time a person can deduct homeowner’s insurance payments is on a rental property because it is then considered a business expense. You cannot deduct the cost of your own insurance premiums from your taxes.

2. Closing Costs

Closing costs are usually an additional 3% to 6%, covering application fees, appraisals, attorney fees, escrow closing fees, and courier fees. It could also pay for FHA mortgage insurance, a credit reporting fee, and a homeowners association transfer fee.

Most closing costs cannot be used for tax deductions when you buy a home, with the exception of discount points that can be paid to lenders to reduce your interest rate.

3. Moving Expenses

Although you used to be able to deduct moving expenses from your taxes, this item was removed in 2017 due to the Tax Cuts and Jobs Act, in all cases except for members of the Armed Forces, who are on active duty, and who must move due to a permanent change of station. For everybody else, moving expenses are not deductible.

4. Down Payments

Your home down payment, or the initial lump sum of money you put towards the purchase of a home, is not tax deductible.

5. Reverse Mortgage

Reverse mortgages are considered loan advances, which are paid by a lender as you continue to live in your home. This amount becomes due (with interest) once you sell the home, reach the end of the loan period, or pass away. You cannot deduct the interest accrued on a reverse mortgage, because it is considered home equity debt.

6. Mortgage Principal

The mortgage interest deductions allowed by the IRS only let you claim the portion of your monthly payment that goes toward interest. The rest of your mortgage payment (principal) is not deductible.

How To Claim the Mortgage Interest Deduction?

If you are a homeowner who makes monthly mortgage payments to a bank or other qualified lender, you most likely qualify as a person who can legally deduct your interest payments from your income. This is an excellent way for taxpayers to reduce their taxes owed, and save money.

The following are the steps to take if you want to claim your mortgage interest as a tax deduction:

1. Calculate how much you can deduct. This number will depend on when you received your mortgage, how much you borrowed, and your interest rate. Form 1098 you receive from your mortgage lender will have the amounts listed.

2. Itemize your taxes. This means that rather than using a standard deduction, you must use Schedule A (Form 1040), listing all of your deductions (including the mortgage interest amount you calculated) on the appropriate lines of Schedule A, and then add them up. Don’t forget to check the IRS website to see what other deductions you may qualify for.

3. Subtract the total amount of your deductions from your taxable income.

By following these simple steps, you could take hundreds or thousands of dollars off of your tax bill. It may be a little bit more work, but it is definitely worth it.

Save Time and Money on Tax Prep with Freshbooks

While it is not difficult, many homeowners simply do not know how to calculate their mortgage interest deduction or itemize their taxes, or feel overwhelmed at the prospect of preparing to do taxes.

To make things easier, use FreshBooks accounting software to track and categorize your expenses. This user-friendly software will capture every eligible deduction, ensuring you do your taxes right, and save money on your yearly tax bill.

Homeowners, small business owners, and all taxpayers will enjoy the simple interface, the helpful tips, and the organization FreshBooks provides. Try FreshBooks for free to see how easy tax time can be.

FAQs About Mortgage Interest Deduction

If you want to know more, read on to find out more about mortgage interest deductions, itemization, and US tax laws in these mortgage interest deduction FAQs.

Is mortgage interest deductible on federal or state taxes?

The mortgage interest tax deduction is for those who itemize their federal taxes. There are also some states that assess income tax that may allow mortgage interest to be claimed, so it is prudent to check your local state tax laws.

Why can’t I deduct my mortgage interest?

You may have too many houses. You cannot deduct mortgage interest on a property other than your main or second home.

Can you deduct mortgage interest if you don’t itemize?

No, homeowners must itemize their taxes to take advantage of the mortgage interest deduction. FreshBooks expense tracker can help you track all of your expenses and payments throughout the year, making it easier to calculate your qualifying deductions at year-end.

How much mortgage interest can I deduct in 2023?

In 2023, you can deduct the interest you paid on the first $750,000 of your mortgage amount if you purchased your home after December 16, 2017. The limits are higher for people who purchased homes before that date.

What are the rules for Mortgage Interest Deduction on home equity loans?

For the tax years of 2018 through 2025, home equity loan interest is not deductible, but if you acquired the loan before 2018, or will get a loan after 2025, deductions may be available to you. This only applies if you use the proceeds to build, purchase, or substantially improve the home.

Are there state-specific Mortgage Interest Deduction rules?

Yes, every state that allows itemized deductions lets you claim at least a partial mortgage interest deduction. Please check your state laws to verify if you can report the deduction on your state income tax return.

More Useful Resources

Sandra Habiger, CPA

About the author

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.