Mortgage Interest Deduction: Reducing Your US Taxable Income

Eligibility Requirements for Mortgage Interest Deduction

To claim the Mortgage Interest Deduction (MID), certain key requirements must be met to ensure the interest qualifies for a federal income tax deduction.

Tax Filing Status

You must file Form 1040 or 1040-SR and itemize deductions on Schedule A. Taxpayers taking the standard deduction cannot claim the MID.

Secured Debt

The mortgage must be a secured debt, meaning your home serves as collateral for the loan. Unsecured loans or liens on general assets do not qualify.

Qualified Home

The deduction applies to interest on your main home or second home, including houses, condos, co-ops, mobile homes, or houseboats with sleeping, cooking, and toilet facilities. Special situations, such as time-share homes or homes under construction, may qualify if certain conditions are met.

Use of Loan Proceeds

Interest is deductible only if the mortgage funds are used to buy, build, or substantially improve the home securing the debt. Home equity loans are included under the current $750,000 limit if used for improvements.

Dollar Limits

• Mortgages taken after December 15, 2017: interest deductible on up to $750,000 ($375,000 if married filing separately)
• Mortgages taken before December 16, 2017: interest deductible on up to $1 million ($500,000 if married filing separately)
• Mortgages predating October 14, 1987 (“grandfathered debt”) remain fully deductible

Special Situations

Certain fees and prepaid interest, also known as points, may be deductible either fully in the year paid or spread over the life of the mortgage. Cooperative apartment owners, divorced taxpayers, and recipients of government assistance may also have additional rules.

Documentation

You must have a Form 1098 from the lender showing interest paid, and report any deductible interest not included on the form on Schedule A. High-income taxpayers benefit most, as they are more likely to itemize and hold larger mortgages.

Mortgage Points

Mortgage points, also called discount points or origination fees, are prepaid interest that can lower your mortgage rate. One point equals 1% of the loan amount (for example, $3,000 on a $300,000 loan). Points paid on a primary residence purchase are generally fully deductible in the year paid if they are a standard practice in your area, clearly shown on your settlement statement, and calculated as a percentage of the mortgage.

For refinances or second homes, points must usually be deducted over the life of the loan rather than all at once. Additionally, if your mortgage exceeds IRS limits on home acquisition debt ($750,000 for new loans after Dec. 15, 2017, or $1 million for older loans), your deductible points are proportionally reduced using the same calculation applied to your mortgage interest.

2017 Changes in Legislation

The Tax Cuts and Jobs Act (TCJA) of 2017 tightened the rules for home equity loans and HELOCs. Previously, interest could be deducted even for personal expenses, up to $100,000 in debt. Under current law, interest is only deductible if the funds are used to buy, build, or substantially improve the home securing the loan, and the total mortgage debt (including first and second mortgages) must comply with the $750,000/$1,000,000 limits depending on origination date.

Home Equity Loans and Lines of Credit (HELOCs)

Interest on HELOCs and second mortgages is only deductible if the borrowed funds are used to buy, build, or substantially improve the home securing the loan.

Deductible Uses (Qualifying Home Improvements):

• Kitchen remodels
• Roof replacement
• Major renovations that add value, extend life, or adapt your home to new uses

Non-Deductible Uses:

• Debt consolidation unrelated to home improvement
• Paying off credit cards or personal loans
• Personal expenses not tied to the home