Home Mortgage Tax Deduction

There are a number of benefits that come from home ownership. One of which is the mortgage tax deduction, but there are certain restrictions that should be considered.


Many home shoppers are excited about the prospect of owning a home, not just because they have a house to call their own, but also because of the tax benefits often derived from home ownership.

The mortgage tax deduction may be a little overhyped. The mortgage tax deduction isn’t an automatic deduction. In fact, some homeowners may get little or no tax benefit from paying mortgage interest.

How the Mortgage Tax Deduction Works

The mortgage tax deduction is one of those tax deductions that requires you to itemize to get the benefit. The IRS automatically lets you take a standard deduction each year based on whether you’re married or single. If your itemized deductions, including mortgage interest and other deductions, are less than the standard deduction, it makes more sense to take the standard deduction. In 2011, the standard deduction for single tax filers is $5,800; $11,600 for joint filers; and $8,500 for head of household filers.

You don’t get to reduce your tax by the full amount of the mortgage interest paid each year. Instead, you’ll only be able to reduce your income tax by a percentage based on your tax bracket: $15 for every $100 in mortgage interest paid if you’re in the 15% tax bracket; $25 for every $100 in mortgage interest paid if you’re in the 25% tax bracket; and so on. So if you make more money and are in a higher tax bracket, your mortgage deduction is bigger.

Because most mortgage interest is paid at the beginningof the loan, you may not get the benefit of the mortgagetax deduction for long. Each year, you’ll pay less and lessmortgage interest and your other itemized tax deductionswill have to increase if you want to continue to take thetax deduction.

How to Qualify for the Mortgage Tax Deduction

To take the mortgage tax deduction, you must file yourtaxes on Form 1040 and itemize your deductions on Schedule A. You must be liable for the loan. You’re not allowed to deduct payments on someone else’s loan if you’re not legally liable for the payments. The mortgage must be secured debt for a qualified home, meaning your home could satisfy the debt in case of default and the mortgage is recorded with your state.

Which Mortgage Costs Are Deductible?

Your mortgage lender will send a Mortgage Interest Statement, Form 1098 to you each year that lists the amount of mortgage you paid in the year. The number is also reported to the IRS so it’s important that the numbers on your tax return match what’s on the form. The mortgage lender will also send a statement including the amount of property taxes you paid in the year. This tax is also deductible on your income tax return.

There’s a maximum mortgage limit of $1 million on your first or second home and the home must be secured by a mortgage. You can take a deduction for a home you purchased with cash and later borrowed a home equity loan.

If your mortgage was originated from 2007 through 2011, you can deduct private mortgage insurance (PMI) payments if your income is less than $109,000 for joint filers and $54,500 for separate filers. And ultimately cancel private mortgage insurance.

You can deduct the money paid for points paid to reduce your interest rate. Points are deducted in the year they’re paid.