What Is a Mortgage Interest Deduction?

What Is a Mortgage Interest Deduction?

Let me explain what the mortgage interest deduction really is. It's a standard itemized deduction that lets you, as a homeowner, cut down your taxable income by subtracting the interest you've paid on loans used to buy, build, or improve your home.

Your mortgage company reports this amount to you every year on Form 1098. This is essentially a federal tax perk aimed at making owning a home more affordable, but you have to itemize your deductions to use it, which means it mostly helps wealthier homeowners in practice.

Key Takeaways

Here's what you need to know upfront: This deduction directly lowers the taxes you owe if you're a homeowner. You report it on Form 1098 and then on Schedule A or E, based on whether it's for your main home or a rental. The 2017 Tax Cuts and Jobs Act dropped the max mortgage principal for the deduction to $750,000 from $1 million. Some folks with older loans get to ignore these new limits thanks to legacy rules. And honestly, a lot of taxpayers just take the standard deduction instead because it's bigger now.

How a Mortgage Interest Deduction Works

You report home mortgage interest on Schedule A of your 1040 form. If it's for a rental property, it goes on Schedule E instead. Even interest from home equity loans counts as deductible home mortgage interest.

To claim it, you must itemize your deductions. For many people, this deduction is the key reason they itemize at all—without it, their other deductions wouldn't beat the standard deduction.

Quick note: This deduction started back in 1913 with the income tax itself.

The TCJA from 2017 shook things up by capping the deductible interest at $750,000 of mortgage debt for new loans, down from $1 million. It also jacked up the standard deduction, so fewer people bother itemizing. Right after, about 135.2 million taxpayers were expected to take the standard deduction. By 2022, only 18.5 million itemized, and of those, 14.2 million claimed this deduction. With around 75 million mortgages out there in mid-2022, most homeowners get zero benefit from it.

Another point: You can deduct interest on loans for second homes or vacation properties, but there are restrictions.

Qualifications for a Full Mortgage Interest Deduction

The TCJA in 2017 cut back on how much interest you can deduct. Now, for single or joint filers, it's only on the first $750,000 of your mortgage ($375,000 if married filing separately), instead of $1 million ($500,000 separately).

But if you meet specific criteria, you might deduct all your interest. It depends on when you got the mortgage, how much it is, and what you used the money for. If your mortgage fits the rules all year, you can deduct everything. Legacy debt—mortgages before IRS-set dates—qualifies for more.

Important Requirement

Remember, this deduction only applies if your mortgage is secured debt—you've signed a deed of trust, mortgage, or land contract that secures your home as collateral for the loan.

Examples of the Mortgage Interest Deduction

The TCJA lowered the limits and axed or changed other deductions, so many of you end up with fewer itemized options and just take the standard deduction. But it can still pay off for some.

When the Mortgage Interest Deduction Is Beneficial

Take a married couple in the 24% bracket who paid $20,500 in mortgage interest last year. For 2024, the standard deduction is $29,200. They add up all itemized deductions, including that interest, and get $32,750. Since that's more than $29,200, itemizing saves them money by claiming the deduction.

When the Mortgage Interest Deduction Is Not Beneficial

Now, a single filer in the same bracket paid $9,700 in interest and has $1,500 more in itemized stuff, totaling $11,200. The 2024 standard for singles is $14,600. Since $11,200 is less, they skip itemizing—no benefit from the deduction.

For 2025, standards go up: $15,000 single, $30,000 joint, $22,500 head of household.

Can You Deduct Both Property Taxes and Mortgage Interest?

If you itemize and qualify, yes, you can deduct both property taxes and mortgage interest from your taxable income.

Can Co-Owners of a Property Deduct Mortgage Interest?

Co-owners deduct based on their ownership share. If you own half, you deduct up to 50% of the interest, within the overall limits.

Can You Use the Mortgage Interest Deduction After You Refinance Your Home?

Yes, after refinancing a primary or secondary home, you can deduct the interest if the funds went toward capital improvements that boost the home's value.

The Bottom Line

In summary, if you itemize, this deduction cuts your taxable income. The TCJA dropped the limit to $750,000 from $1 million, but legacy clauses let some deduct more. The higher standard deduction means most homeowners don't claim it anymore.