The Home Mortgage Interest Tax Deduction in 2020

Paying mortgage interest can still reduce your taxable income

couple filing taxes on the computer

Tetra Images

Owning your own home comes with some nice tax perks—one of them being the home mortgage interest deduction.

The Tax Cuts and Jobs Act (TCJA) affected this deduction somewhat when it went into effect in 2018, but the legislation did not eliminate the deduction from the tax code entirely. It just sets some limits and restrictions. Learn about how to claim the home mortgage interest deduction and what to expect in the process.

How to ​Claim Home Mortgage Interest

​You must itemize your deductions on Form 1040, Schedule A to claim mortgage interest. This means foregoing the standard deduction for your filing status. So you can itemize, or you can claim the standard deduction, but you can't do both.

Enter your mortgage interest costs on lines 8 through 8c of Schedule A, then transfer the total from Schedule A to line 9 of the 2019 Form 1040. This 1040 is different from the one that was in use for the 2018 tax year, so the lines won't be the same.

Determining How Much Interest You Paid

You should receive Form 1098, a Mortgage Interest Statement, from your mortgage lender at the beginning of each tax year. This form reports the total interest you paid during the previous year if it exceeds $600. You don't have to attach the form to your tax return because the financial institution must also send a copy of Form 1098 directly to the IRS, so the IRS already has it.

Make sure the mortgage interest deduction you claim on Schedule A matches the amount reported on Form 1098. The amount you can deduct might be less than the total amount that appears on the form based on certain limitations. 

Keep Form 1098 ​with a copy of your filed tax return for at least four years. Keeping copies of your filed tax returns will help in preparing for future tax returns.

Is the Deduction Worth Claiming?

Schedule A covers many other deductible expenses as well, including real estate property taxes, medical expenses, and charitable contributions. ​Sometimes all these add up to more than the standard deduction for your filing status, making it worth the time and effort involved with itemizing your deductions, and sometimes they don't.

You'll save more tax dollars by skipping the home mortgage interest deduction and claiming the standard deduction instead if the total of all your itemized deductions doesn't exceed the amount of the standard deduction you're entitled to.

As of the 2020 tax year, the standard deduction is:

  • $12,400 for single taxpayers and married taxpayers who file separate returns, up from $12,200 in the 2019 tax year
  • $24,800 for married taxpayers who file jointly and for qualifying widow(er)s, up from $24,400 in 2019
  • $18,650 for those who qualify as head of household, up from $18,350 in 2019

These figures are roughly double the standard deductions that were in place in tax year 2017. As a result, you might not have enough itemized deductions overall to surpass the standard deduction you're entitled to for your filing status.

It's usually advisable to complete Schedule A and compare the total of your itemized deductions to your standard deduction to find out which method is best for you.

What Homes Are Covered?

Assuming you do choose to itemize, the home mortgage interest deduction comes with multiple qualifying rules.

First, the mortgage interest deduction includes what you paid on loans to buy a home, on home equity lines of credit, and on construction loans. But the TCJA placed a significant restriction on home equity debt beginning with the 2018 tax year. You can't claim the deduction for this type of loan unless you can prove that it was taken out to "buy, build, or substantially improve" the home that secures the loan.

In other words, you're out of luck if you refinance to pay for your child's college education or your honeymoon. This wasn't the case before 2018.

The deduction is also limited to interest you paid on your main home or a second home. Interest paid on third or fourth homes isn't deductible.

​Your home can be a single-family dwelling, a condo, a mobile home, a cooperative, or even a boat—pretty much any property that has "sleeping, cooking, and toilet facilities," according to the IRS. There are several other qualifying rules to the deduction.

You Must Be the Obligor

​You must also be legally on the hook for the loan—the debt can't be in someone else's name unless it's your spouse and you are filing a joint return. It must be a bona fide loan, in that you have a contractual obligation to pay it back. Your home must act as security for the loan and your mortgage documents must clearly state this.

When it comes to filing a joint return, you're entitled to deduct only the interest that you paid personally, regardless of which of you received a Form 1098 from the lender.

Dollar Limitations on Loans

Loans used to buy or build a residence are called "home acquisition debt." The term refers to any loan you take for the purpose of "acquiring, constructing, or substantially improving" a qualified home.

It used to be that you could deduct interest on home acquisition debts of up to $1 million for your main home and/or your secondary residence back in 2017, but the TCJA reduced this to $750,000 beginning with tax year 2018. The limit drops even more to $375,000 if you're married and filing a separate return.

Let's say you borrowed $800,000 against your primary residence and $400,000 against your secondary residence. Both loans were used solely to acquire or substantially improve the properties. Together, the loans add up to $1.2 million, exceeding the $750,000 limit under the terms of the TCJA.

You can only claim a mortgage interest deduction for the percentage attributable to the first $750,000 you borrowed. Interest associated with that other $450,000 is just money that you spent. You don't get a tax break for it.

Exceptions to the $750,000 Rule

The IRS acknowledges two exceptions to the $750,000 debt limit as of 2019. You can use the old $1 million limit in two circumstances:

  • You took out the mortgage before Dec. 16, 2017 if this mortgage, plus any grandfathered debt, total $1 million or less in debt
  • You took out the mortgage on or before Oct. 13, 1987, which makes it grandfathered debt

Home Construction Loans

You can deduct interest on mortgages used to pay for construction expenses, if the proceeds are exclusively used to acquire the land and for construction of the home. Expenses incurred during the 24 months before construction is completed count toward the $750,000 limit on home acquisition debt.

But there's a catch. If you deduct interest on a construction loan for two years and you then decide to sell the property rather than move in and use it as your residence, you might have to amend your tax returns for the years you deducted the interest to characterize it as investment interest instead. This can limit its deductibility, as the IRS might want some money back.

Points You've Paid

Points paid on acquisition debt for primary and secondary homes are fully deductible in the year they're paid. Points aren't always reported on Form 1098, but you might be able to find them on your settlement statement. Otherwise, ask your lender.

When to Seek the Help of a Tax Professional

Figuring out the home mortgage interest deduction is straightforward for some taxpayers, but not so much for others. Add up the interest reported on your Form 1098 and enter the total on Schedule A. You can use the worksheet in Publication 936 to calculate your allowable deduction.

You might want to check with a tax professional, however, if you bought or sold property during the tax year, or if your home acquisition debt exceeds the $750,000 limit. In fact, it would make sense to seek the advice of a tax professional even before you buy or sell real estate, if only to get a handle on the tax consequences of your decision.