Understanding the Mortgage Interest Deduction

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One of the main mortgage tax benefits of homeownership is the mortgage interest deduction. When you deduct the interest paid on your mortgage, you reduce your taxable income by that amount. Here’s what to know about the deduction, its limitations and how it may affect you at tax time.

How does the mortgage interest deduction work?

The mortgage interest deduction allows you to deduct mortgage interest payments from your taxable income each year. The deduction may apply to a mortgage on your main home — and potentially a second home you own — if the debt was used to buy, build or substantially improve the property.

How much mortgage interest can you deduct in 2019?

For the 2019 tax year, the mortgage interest deduction limit is $750,000, which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt. Married couples filing their taxes separately can deduct interest on up to $375,000 each. The maximum amount applies to home loans originated after Dec. 15, 2017, and is in effect through 2025.

The former limit of $1 million for single filers and married couples filing jointly, and $500,000 for married couples filing separately, still applies for mortgages originated before Dec. 16, 2017, even if they were later refinanced. There’s an exception for people who closed on a home purchase before Jan. 1, 2018. They can also use the old limit of $1 million — provided they purchased the home by April 1, 2018.

Which types of mortgage interest are deductible?

Aside from the interest portion of your mortgage payments, you may be able to deduct the following types of mortgage interest:

  • Late mortgage payment fees that aren’t part of a specific service.
  • Prepayment penalties for paying off your mortgage early.
  • Interest paid on your mortgage before selling your home.
  • Interest paid while participating in an emergency homeowners loan program or the Hardest Hit Fund program.
  • Prepaid interest, or mortgage points, paid as part of your closing costs.

You may also deduct interest payments on a second mortgage, such as a home equity loan or line of credit, but only if the debt was used to buy, build or improve your main home or second home. The mortgage interest deduction limit applies cumulatively to first and second mortgages.

For cash-out refinances, while you may qualify to deduct the interest paid on your original mortgage amount, you’re allowed to deduct only the interest paid on the equity you cash out if those funds are used for home improvements.

A mortgage interest deduction example

Let's compare two homeowners who each have two outstanding mortgage balances and want to claim the mortgage interest deduction. Homeowner A owes $400,000 for the mortgage on their main home purchased before Dec. 16, 2017, and another $250,000 on a mortgage used to purchase a vacation home in spring 2018.

Homeowner B owes $600,000 on a mortgage for their main home that was originated before Dec. 16, 2017. In fall 2019, they took out a $300,000 home equity loan to cover college expenses and consolidate non-mortgage debt.

Maximum mortgage interest deductionLoan #1Loan #2Total Qualifying Loan Balance
Homeowner A$1 million or $750,000 (depending on the origination date)$400,000$250,000$650,000
Homeowner B$1 million or $750,000 (depending on the origination date)$600,000$300,000$600,000

How do the rules apply here? For Homeowner A, their $400,000 mortgage is less than both the $1 million and $750,000 limits. Because the $250,000 began after the cutoff date, we must use the $750,000 limit. Homeowner A borrowed a new mortgage for their vacation home, which means they may qualify to deduct the interest on that loan as well as the mortgage on their main home.

The grand total of both loans is less than the $750,000 limit, giving Homeowner A the opportunity to fully deduct the interest paid on both loans. But, if they had borrowed a home equity loan or line of credit against their main home to buy their vacation home, the interest on that loan or line wouldn’t be deductible.

Homeowner B's situation looks a little different. While they qualify to deduct all the interest paid on the $600,000 mortgage secured by their main home, they can’t deduct the interest paid on the $300,000 home equity loan, since it wasn’t used to make home improvements.

Mortgage interest deduction vs. standard deduction

The Tax Cuts and Jobs Act lowered the maximum mortgage interest deduction amount, but increased the standard deduction amounts. Due to these changes, fewer taxpayers may choose to itemize their deductions.

The 2019 standard deduction amounts are:

  • Single/married filing separately: $12,200
  • Head of household: $18,350
  • Married filing jointly: $24,400

We calculated the approximate amount of mortgage debt you’d likely need for the interest payments in the first year of your loan to outweigh the standard deduction.

Filing Status2019 Standard DeductionMortgage Balance needed to itemize
Single or married filing separately$12,200$340,000
Head of Household$18,350$520,000
Married filing jointly$24,400$680,000
Based on first-year interest costs for a 30-year, fixed-rate mortgage at the current national average rate of 3.65%.

The table above shows that if you’re single taxpayer, you’d need at least $340,000 in mortgage debt to claim the mortgage interest deduction. But even if your mortgage balance isn’t quite that high, you may also claim other deductions on your tax return, which could still make itemizing the better choice. For example, you can deduct up to $10,000 in state and local taxes — including property taxes. The limit is $5,000 for married couples filing separately, however.

Of course, your particular situation will depend on your mortgage rate, as well as the number of monthly mortgage payments you make before tax season arrives. And because fixed-rate mortgages are amortized into equal monthly payments, with every month that passes you pay fewer dollars toward interest — and more toward principal.

Thanks to these variables, the easiest way to determine whether itemizing deductions makes sense is to review your mortgage interest statement (Form 1098), which you’ll receive from your lender if you’ve paid at least $600 in interest during the previous tax year, and identify any other deductions that apply to your situation. Consult with your tax professional for additional guidance.

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