The mortgage interest tax deduction was actually created alongside the income tax in 1913, and it has always been the most popular tax deduction used by Americans every year. If you are going to be able to use this deduction on your tax return, then you need to make sure that you understand everything there is to know about it. Take a look at the rules of the mortgage interest tax
deduction before you think about deducting too much money on next year’s tax form.
The good news is that there are not a lot of limitations present when it comes to this specific tax deduction.
Qualifications for the Mortgage Interest Deduction
Most people will be able to write off their mortgage interest rates without any problems, and here is the list of requirements that go along with this deduction:
- You are required to file a Form 1040 with deductions listed on Schedule A.
- This must be your loan. You cannot deduct interest paid on a loan that is actually under someone else’s name.
- You must make sure that the interest payments were made on a home that qualifies for this deduction. You can read more about these requirements below.
There is always going to be a bit of confusion when it comes to federal taxes, but these are the basic guidelines that you can follow to make sure that you qualify for the deduction. In addition to the above mentioned qualifications, you also need to make sure that the combination of your loans for buying, improving or building the home do not exceed $1.1 million in debt when combined with your equity debt. The mortgages must also fall into one of these two categories:
- Interest on a mortgage debt used for non-equity purposes from before October 13, 1987 may not be greater than $1 million for a married couple and $500,000 for an individual.
- Any mortgages created after October 13, 1987 for equity or other, similar purposes will only qualify for complete interest deduction if the amount of the mortgage is less than $100,000 for a married couple. If you are a single individual, then the amount must be lower than $50,000. These mortgages must also also have to equal an amount lower than the fair market value of the house subtracted by all of the debt that was grandfathered in from after October 13, 1987.
This is a lot of information to take in right away, and you are definitely in good shape if you have been able to follow along so far. One last thing to remember is that you can only use the mortgage interest deduction if your mortgage is considered to be secured debt. Any unsecured loans will count as personal loans and will not qualify for this deduction.
What is a Qualified Home?
In the above section, we talked about a “qualified home” as being part of the main requirements for this deduction. The definition of a qualified home is a home that has places to sleep, cook and go to the bathroom. It does not matter if the house is your actual home, as long as it contains these three things. That being said, you may only deduct interest from the mortgage on one of your second homes. You also have to live in that second home for at least 14 days during the year, or 10% of the time that the home is rented out if it is a rental home. Interest on a rental home that does not meet these requirements will have to be listed on Schedule E instead of Schedule A on your Form 1040.
Refinancing Your Home
In a situation where you have refinanced the loan for your home, you will still be able to deduct the interest on your mortgage on your taxes; however, this only holds true if you are not refinancing for the purpose taking out equity. In those cases, the Home Equity Debt Post-October 13, 1987 rules will still apply.
Taking it All In
The mortgage interest tax deduction is an American tradition, and people have been using this deduction since the early years of the income tax. People have talked about getting rid of this deduction completely, but there is no plan to make this happen as of yet.
Written by Brent Wayne, The Management Trust– Guest Blogger