The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations. The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098. This deduction is offered as an incentive for homeowners.
Many times homeowners can deduct the entirety of their mortgage interest paid, as long as they meet all requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage, and how the proceeds of that mortgage are used.
As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Grandfathered debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS) qualifies for the deduction.
If you use the place as a second home—rather than renting it out—interest on the mortgage is deductible within the same limits as the interest on the mortgage on your first home.
- For tax years prior to 2018, you can write off 100% of the interest you pay on up to $1.1 million of debt secured by your first and second homes and used to acquire or improve the properties. (That's a total of $1.1 million of debt, not $1.1 million on each home.) The rules that apply if you rent out the place are discussed later.
- Beginning in 2018, the limit is reduced to $750,000 of debt secured by your first and second home for binding contracts or loans originated after December 16, 2017.
- For loans prior to this date, the limit is $1 million ($1.1 million without the $100,000 home
- Single filers and those married filing jointly in most cases can deduct full interest on mortgages up to $750,000.
- If your second property is a personal residence, you're eligible to deduct mortgage interest in the same way as you would on your primary home—up to $750,000 if you are single or married filing jointly.
If you sold your home to buy this one, you won’t pay taxes on the first $250,000 (also known as a gain). If you file jointly, you won't pay taxes on the first $500,000. That income is free and clear as long as you owned the home, it was your main home for at least two years within the five years leading up to the sale. You also can only get this tax benefit every two years, so if you sold previously, make sure it’s been at least that long before claiming this tax benefit again.
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