This Financial Guide discusses the home mortgage interest deduction. It explains
what tests must be met for interest on a home mortgage to be deductible and discusses
the rules that apply in hybrid situations such as the business use of a home.
Table of Contents
Note: For a discussion of the deductibility of points, please click here.
Deductibility of Home Mortgage Interest, In General
Generally, home mortgage interest is any interest you pay on a loan that is secured
by your main home or by a second home. The loan may be a mortgage to buy your home,
a second mortgage, a line of credit, or a home equity loan.
You can deduct home mortgage interest as an itemized deduction only if you
are legally liable for the loan (i.e., you cannot deduct payments you make
for someone else if you are not legally liable to make them). Further, there
must be a true debtor-creditor relationship between you and the lender.
And, finally, the mortgage must be a "secured debt" on a "qualified home."
These two terms are explained later.
When Is Mortgage Interest Fully Deductible?
In most cases, you can deduct all of your home mortgage interest. Whether it is
all deductible depends on the date you took out the mortgage, the amount of the
mortgage, and your use of the mortgage proceeds.
If all of your mortgages fit into at least one of the following three categories
at all times during the year, you can deduct all of the interest on those mortgages.
If one or more of your mortgages does not fit into any of these categories, you may
be able to deduct part of the interest. The three categories are:
- Mortgages you took out on or before October 13, 1987.
- 2. Mortgages you took out after October 13, 1987, to buy, build, or improve your
homes long as these mortgages plus any mortgages in (1) totaled $1 million or
less throughout the year ($500,000 or less if married filing separately).
- Mortgages you took out after October 13, 1987, for reasons other than to
buy, build, or improve your home (home equity debt), as long as these mortgages
totaled $100,000 or less throughout the year ($50,000 or less if married filing
separately) and totaled no more than the fair market value of your home reduced
by (1) and (2).
The dollar limits for the second and third categories apply to the combined
mortgages on your main home and second home.
What Is ìSecured Debtî?
You can deduct your home mortgage interest only if your mortgage is a secured debt.
A secured debt is one in which you sign an instrument (such as a mortgage, deed
of trust, or land contract) that:
- Makes your ownership in a ìqualified homeî security for payment of the debt,
- Provides, in case of default, that your home can be used to satisfy the debt, and
- Is recorded or is otherwise perfected under any state or local law that applies.
In other words, your mortgage is a secured debt if you put your home up as
collateral to protect the interests of the lender. If you cannot pay the debt,
your home can then serve as payment to the lender to satisfy the debt. Note: A
debt is not secured by your home if it is secured solely because of a lien on
your general assets or if it is a security interest that attaches to the property
without your consent (such as a mechanic's lien or judgment lien).
Note: A debt is not secured by your home if it once was, but is no
longer secured by your home.
A wraparound mortgage is not a secured debt unless it is recorded or
otherwise perfected under state law.
Example: Beth owns a home subject to a mortgage of $40,000. She
sells the home for $100,000 to John, who takes it subject to the $40,000
mortgage. Beth continues to make the payments on the $40,000 note. John
pays $10,000 down and gives Beth a $90,000 note secured by a wraparound
mortgage on the home. Beth does not record or otherwise perfect the $90,000
mortgage under the state law that applies. Therefore, that mortgage is
not a secured debt, and the interest John pays on it is not deductible as
home mortgage interest.
What is a ìQualified Homeî?
To deduct home mortgage interest, youíre the debt must be secured by a qualified
home. This means your main home or your second home. A home includes a house,
condominium, cooperative, mobile home, house trailer, boat, or similar property
that has sleeping, cooking, and toilet facilities.
Tip: The interest you pay on a mortgage on a home other than your
main or second home may be deductible if the proceeds of the loan were
used for business, investment, or other deductible purposes. Otherwise,
it is considered personal interest and is not deductible.
Main home. You can have only one main home at any one time. Generally,
this is the home where you spend most of your time.
Second home. A second home is a home that you choose to treat as your
Second home not rented out. If you have a second home that you do not
hold out for rent or resale to others at any time during the year, you can
treat it as a qualified home. You do not have to use the home during the year.
Second home rented out. If you have a second home and rent it out part
of the year, you also must use it as a home during the year for it to be a
qualified home. You must use this home 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 do not use the home long enough, it is considered
rental property and not a second home.
More than one second home. If you have more than one second home, you
can treat only one as the qualified second home during any year. However, you
can change the home you treat as a second home in the following three situations.
- If you get a new home during the year, you can choose to treat the new home
as your second home as of the day you buy it.
- If your main home no longer qualifies as your main home, you can choose to
treat it as your second home as of the day you stop using it as your main home.
- If your second home is sold during the year or becomes your main home, you
can choose a new second home as of the day you sell the old one or begin using
it as your main home.
The only part of your home that is considered a qualified home is the part
you use for residential living. If you use part of your home for other than
residential living, such as for a home office, you must allocate the use of
your home. You must then divide both the cost and fair market value of your
home between the part that is a qualified home and the part that is not. These
calculations may reduce or even negate your deduction. .
Renting out part of home. If you rent out part of a qualified home
to another person (tenant), you can treat the rented part as being used by
you for residential living only if all three of the following conditions apply.
- The rented part of your home is used by the tenant primarily for residential living.
- The rented part of your home is not a self-contained residential unit having
separate sleeping, cooking, and toilet facilities.
- You do not rent (directly or by sublease) the same or different parts of
your home to more than two tenants at any time during the tax year. If two person
s (and dependents of either) share the same sleeping quarters, they are treated
as one tenant.
Office in home. If you have an office in your home that you use in your business,
you may be entitled to deductions for the business use of your home, including
the business part of your home mortgage interest.
You can treat a home under construction as a qualified home for up to 24 months,
but only if it becomes your qualified home at the time it is ready for occupancy.
The 24-month period can start any time on or after the day construction begins.
You may be able to continue treating your home as a qualified home even after
it is destroyed in a fire, storm, tornado, earthquake, or other casualty. This
means you can continue to deduct the interest you pay on your home mortgage,
subject to the limits described in this publication.
You can continue treating a destroyed home as a qualified home if, within a
reasonable period of time after the home is destroyed, you:
- Rebuild the destroyed home and move into it, or
- Sell the land on which the home was located.
This rule applies to your main home and to a second home that you treat as a
qualified home. Also, it applies whether or not your home is in a federal disaster area.
You can treat a home you own under a time-sharing plan as a qualified home
if it meets all thetests for a qualified home. If you rent out your time-share,
it qualifies as a second home only if you also use it as a home. To know whether
you meet that requirement, count your days of use and rental of the home only
during the time you have a right to use it or to receive any benefits from the
rental of it.
If you are married and file a joint return, your qualified home(s) can be owned
either jointly or by only one spouse.
If you are married filing separately and you and your spouse own more than one
home, you can each take into account only one home as a qualified home. However,
if you both consent in writing, then one spouse can take both the main home
and a second home into account.
Note: If a divorce or separation agreement requires you or your
spouse or former spouse to pay home mortgage interest on a home owned by
both of you, the payment of interest may be alimony.
This section describes certain items that can be included as home mortgage
interest and others that cannot. It also describes certain special situations
that may affect your deduction.
Late payment charge on mortgage payment. You can deduct as home mortgage interest
a late payment charge if it was not for a specific service in connection with your
Mortgage prepayment penalty. If you pay off your home mortgage early, you may
have to pay a penalty. You can deduct that penalty as home mortgage interest
provided the penalty is not for a specific service performed or cost incurred
in connection with your mortgage loan.
Sale of home. If you sell your home, you can deduct your home mortgage interest
(subject to any limits that apply) paid up to, but not including, the date of the sale.
Example: John and Peggy Harris sold their home on May 7. Through April 30,
they made home mortgage interest payments of $1,220. The settlement sheet
for the sale of the home showed $50 interest for the 6-day period in May
up to, but not including, the date of sale. Their mortgage interest deduction
is $1,270 ($1,220 + $50).
Prepaid interest. If you pay interest in advance for a period that goes
beyond the end of the tax year, you must spread this interest over the tax
years to which it applies. You can deduct in each year only the interest that
qualifies as home mortgage interest for that year. However, there is an exception for points.
Mortgage interest credit. You may be able to claim a mortgage interest
credit if you were issued a mortgage credit certificate (MCC) by a state or
local government. If you take this credit, you must reduce your mortgage interest
deduction by the amount of the credit.
Ministers' and military housing allowance. If you are a minister or a
member of the uniformed services and receive a housing allowance that is not
taxable, you can still deduct your home mortgage interest.
Mortgage assistance payments. If you qualify for mortgage assistance
payments under section 235 of the National Housing Act, part or all of the
interest on your mortgage may be paid for you. You cannot deduct the interest
that is paid for you.
Rental payments before real estate closing occurs. If you live in a
house before final settlement on the purchase, any payments you make for that
period are rent and not interest, and therefore not deductible. This is true
even if the settlement papers call them interest.
Mortgage proceeds invested in tax-exempt securities. You cannot deduct
the home mortgage interest on debt used to buy securities or certificates that
produce tax-free income.
Refunds of interest. If you receive a refund of interest in the same
year you paid it, you must reduce your interest expense by the amount refunded
to you. If you receive a refund of interest you deducted in an earlier year,
you generally must include the refund in income in the year you receive it.
However, you need to include it only up to the amount of the deduction that
reduced your tax in the earlier year. This is true whether the interest overcharge
was refunded to you or was used to reduce the outstanding principal on your mortgage.
Mortgage Interest Statement (Form 1098)
If you paid $600 or more of mortgage interest (including certain points)
during the year, you will usually receive a Form 1098, Mortgage Interest
Statement from the mortgage holder, showing the amount of interest you paid.
Tip: You should receive the statement for each year by January 31
of the following year. A copy of this form is also sent to the IRS.