Is Your Mortgage Interest Tax Deductible?

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The deduction on your taxes for mortgage interest is one of the benefits that comes from financing a new home purchase. If you itemize deductions on your tax return, your mortgage interest is likely to be tax deductible.

As a matter of fact, you can even claim a boat or motor home as your home, or a second home, and thus any mortgage interest you pay on these items can also be tax deductible.

Below are the rules that apply to qualify for the mortgage interest deduction.

Requirements for Mortgage Interest to Be Tax-Deductible

  • You must itemize your deductions on Form 1040 when filing your taxes.
  • You must be legally liable for the debt (meaning the mortgage must have your name on it).

If you meet both criteria above then you can deduct interest paid on up to $1 million of mortgage debt. (Note: if you took your mortgage out before Oct. 13, 1987, this dollar limit does not apply).

The $1.1 million total limit is broken down into two parts as follows:

  • You can deduct interest paid on up to $1 million of mortgage debt used to buy, build or improve your home.
  • You can deduct interest on up to $100,000 of mortgage debt that was used for a purpose other than to buy, build or improve your home.

The limits above mean that if you borrow $200,000 on your home to put your children through college, only mortgage interest on the first $100,000 would be deductible because the funds were not used to buy, build, or improve your home.

Even though you may get a tax deduction, do not take out a mortgage for the tax deduction. Instead, think of the tax deduction as an "extra" break you may get for something that you can afford—and would have purchased—even if there was not a tax deduction involved. 

Mortgage Interest on Your Motorhome or Boat

A home is defined by the IRS as “a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.”

This means the interest you pay on a loan to acquire a motorhome or boat that meets the criteria above is tax deductible. That's great, but once again, the tax deduction is not the reason to purchase these items.

Mortgage interest on both the main home and second home (which could be a boat or motorhome) may be deducted if both mortgage amounts fall under the total dollar limits above, and as long as both homes meet the IRS definition of home. (If either home is rented out, even for part of the year, there may be restrictions which will limit your ability to deduct the mortgage interest.)

For detailed rules see IRS Publication 936.

Maximize Your Mortgage Interest Deduction

If you do not itemize deductions you will not be able to get a tax benefit for paying mortgage interest.

Even if your mortgage interest is tax deductible, in many cases the deduction may not provide as big of a benefit as you think. For example, you will get to take a standard deduction no matter what. For tax year 2017 the standard deduction for a married couple was $12,700. Under the new tax laws, the standard deduction for tax year 2018 rose to $24,000 for couples.

Assume you have deductions from charitable contributions and state taxes paid that add up to $8,000, and you have mortgage interest of $8,000. Your itemized deductions total up to $16,000, which is only $3,400 more than the standard deduction. In this case, the mortgage interest is providing $3,400 of additional deductions beyond your standard deduction. At the 25% marginal rate that saves you $850 in federal taxes. 

If you do itemize deductions, as your loan balance gets smaller you will pay less and less interest, and the tax benefit you receive from the mortgage interest will get smaller each year. As you near retirement, pay attention to this, as the mortgage interest deduction may be less in retirement due to having a lower loan balance. As the balance gets lower, you are getting little benefit from deducting the interest. If you have the savings to do so it may make sense to pay the mortgage off a few years early

If you are planning to make extra payments on your mortgage, remember any extra payments made before year-end will increase the interest paid in the current year, and thus increase the deduction you get in the current year.

Update: The 2018 tax reform passed by Congress made significant changes to the standard deduction, tax brackets, and other items for tax year 2018 but the mortgage interest deduction stays in place. However, with the higher standard deduction threshold, talk to a tax professional about what makes sense for your 2018 income tax returns.