Mortgage interest deduction: Definition, qualifications, and how to claim it

If you own a home, you may not realize there’s a tax benefit: the mortgage interest tax deduction. The answer for those wondering, “Is mortgage interest deductible?” is “yes.” To reduce your taxable income, you can deduct the interest you pay each tax year on your individual income tax return, which is of value amidst rising mortgage rates.

Understanding the tax rules, including the mortgage interest deduction limit, is key to taking this income tax deduction. Learn more about deducting mortgage interest in this post.

Who qualifies for the mortgage interest tax deduction?

First, let’s answer the question, “How does mortgage interest work?” When you repay a home mortgage loan each month, you pay a principal amount, plus interest. While money paid toward principal isn’t deductible, the interest is.

If you itemize deductions on Schedule A, you can deduct qualified mortgage interest paid on a qualifying residence, including your:

• Main home, or
• Second home

Homeowners must be legally responsible for repaying the loan to deduct the mortgage interest. Also, the interest must be paid on a debt that is an acquisition indebtedness, which is a debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property that is secured by the debt.

You can increase your mortgage interest deduction by making extra mortgage payments yearly. For example, if you pay your January mortgage in December, you’ll have one extra month’s interest to deduct. However, you can deduct only what qualifies as home mortgage interest for that year. This might work in your favor when it comes to mortgage points (a fee you can pay to help lower your mortgage interest rate). And if the loan proceeds are used to substantially improve the main residence, the points are fully deductible in the year the mortgage is refinanced

What qualifies as mortgage interest?

As a taxpayer, you can fully deduct most interest paid on home mortgages if all the Internal Revenue Service’s (IRS) requirements are met. You must separate qualified mortgage interest from personal interest. Mortgage interest is usually deductible, but personal interest isn’t.

Mortgage interest deduction limit

The deduction for mortgage interest is allowed for home acquisition debt. (A home mortgage is also called acquisition debt.  These debts are used to buy, build, or improve your main or secondary home.)

If you’re questioning, “How much mortgage interest can I deduct on my taxes?” you can fully deduct the home mortgage interest you pay on acquisition debt as long as the debt isn’t more than the following amounts within a tax year:

• $750,000 of mortgage debt if the loan was finalized after Dec. 15, 2017
• $1 million of mortgage debt if the loan was finalized on or before Dec. 15, 2017

These limits are halved if you’re Married Filing Separately. (Note: The lower debt limit is effective 2018 through 2025 and will revert back to $1 million after 2025 (barring legislation passing.))

You can’t deduct the interest you pay on home equity loans or home equity lines of credit if the debt is used for something other than home improvements. This includes things like using it to pay for college tuition or to pay down credit card debt.

An example: In 2020, Chris bought his main home for $500,000. A few years later, he owed $400,000 on the original mortgage and took out a $60,000 home equity loan. He used the money to build a sunroom and install an indoor pool. His home is now worth $700,000. He then took out another $130,000 home equity loan and bought a sailboat.

On his 2023 tax return, it’s better for him to itemize his deductions vs. claiming the standard deduction. That said, he can deduct the home mortgage interest he pays on:

• $400,000 left on the original mortgage (acquisition debt)
• $60,000 sunroom and pool loan (acquisition debt)

He can’t deduct any interest related to the home equity loan for the sailboat.

Splitting the home mortgage interest deduction

What if you share a mortgage with another person? How do you split the home mortgage interest deduction with your spouse? You can each split the mortgage interest you paid if the above requirements are met. If one person in a party doesn’t itemize deductions, the other can’t deduct the full amount of the mortgage interest unless they actually paid it.

Mortgage interest deduction exceptions

Here are some exceptions to the home mortgage interest deduction:

• Suppose a first or second home is used for personal and rental use. In that case, you can allocate the deduction limited to the part of the home allocated for residential living or follow the special variation home rules for the second home. Learn more about navigating income tax on rental properties.
• If part of your home is used as a home office, then that portion should be allocated as a business expense as a home office deduction, not the mortgage interest deduction.

How to claim the mortgage interest deduction

If you’re wondering how to claim the mortgage interest tax deduction, there are a few pointers to consider.

1. Itemize your taxes

As mentioned above, you claim the mortgage interest deduction only if you itemize vs. take the standard deduction when you do your taxes. You’ll use Tax Form 1040 (Schedule A) to itemize tax deductions.

2. Get your IRS Form 1098

You will get Form 1098 if you pay $600 or more mortgage interest throughout the tax year from your bank lender in late January or early February. This tax form details how much you paid in mortgage interest in a year. Your lender also sends a copy of that 1098 to the IRS. Use this form in the event of an IRS tax inquiry or audit.

Use Schedule E (1098) for rental property interest.

3. Calculate your mortgage interest deduction

You will need to calculate your deduction by figuring how much interest will qualify for the deduction. Remember the rules above for what kinds of interest payments qualify for deduction.

4. Report the deduction on Form 1040

You will report the deduction on Form 1040, Schedule A.

Navigating the mortgage interest deduction

It pays to take mortgage interest deductions, but it requires a little extra legwork to claim. If you’re looking for help claiming the mortgage interest deduction or other valuable tax deductions, H&R Block can help. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you with your tax preparation and get your max refund or lower what you owe in income tax.