Mortgage Interest Deduction

Owning a home in Raleigh, North Carolina comes with a variety of tax benefits, and one of the most significant is the ability to deduct mortgage interest. Understanding which expenses qualify for this deduction and how to optimize your tax filings can result in substantial savings. Here’s a comprehensive guide on what qualifies for the mortgage interest deduction and how to claim it.

Mortgage Interest Deduction: What Qualifies and How to Maximize Your Benefits

How Does the Mortgage Interest Deduction Work?

The mortgage interest deduction allows homeowners to deduct the interest paid on loans used to purchase, build, or improve a first or second home. This deduction is itemized, meaning you’ll need to list your deductible expenses rather than take the standard deduction on your tax return.

The rules for this deduction can vary by state, and homeowners who purchased a property after December 15, 2017, face a different set of rules. For example, homeowners who bought before this date can deduct the interest on up to $1 million of mortgage debt ($500,000 if married and filing separately). However, for those who bought a home after December 15, 2017, the limit is reduced to interest on $750,000 of mortgage debt ($375,000 if married and filing separately). It’s essential to consult with a tax professional to ensure you’re maximizing this deduction based on the specific rules for your location and purchase date.

Key Details to Remember

When calculating your mortgage interest deduction, it’s important to keep precise records. Here are some specifics to consider:

•  For homes purchased before December 15, 2017: You can deduct all interest paid on mortgages up to $1 million.
•  For homes purchased after December 15, 2017: The deduction applies only to the first $750,000 of your mortgage loan.

There is an exception for homes under contract before December 15, 2017. If you entered a written agreement before that date and closed by April 1, 2018, you can still deduct interest on up to $1 million of mortgage debt.

What Counts as Mortgage Interest?

Your ability to deduct mortgage interest can depend on factors such as the type of mortgage (primary vs. secondary) and the type of property. Below is an outline of common scenarios:

Primary Residence Mortgage Interest

To claim the mortgage interest deduction on your primary residence, the property must qualify as a:

•  House
•  Apartment
•  Condo
•  Co-op
•  Houseboat
•  Mobile Home or Trailer

Your home must have sleeping, cooking, and bathroom facilities, and it must serve as collateral for the mortgage loan.

Even if you receive a non-taxable housing allowance from the military or as part of ministry work, you may still deduct interest. Additionally, in cases such as a mortgage buyout following a divorce, where you take out a new mortgage to buy out a former partner, the interest is deductible.

Second Home Mortgage Interest

Mortgage interest on a second home can also be deducted, as long as the property is collateral for the loan. However, different rules apply if you rent out your second home, which we’ll cover next.

Rental Property Mortgage Interest

To deduct mortgage interest on a rental property, you must meet occupancy requirements. Specifically, you need to have stayed in the home for more than 14 days or for more than 10% of the total number of days the home was rented at a fair rental price — whichever is longer.

Points Paid on a Mortgage

In some cases, homeowners pay “points” to lower their mortgage interest rate. These points are usually deductible either in the year they were paid or spread over the life of the loan. To qualify for this deduction, you must:

•  Use the loan for your primary home
•  Ensure that paying discount points is a regular practice in your area
•  Have paid the points with non-borrowed funds
•  Ensure that your points were not used to pay non-interest closing costs

Home Equity Loan Interest

If you have a home equity loan, the interest is only deductible if the loan was used for the purchase of the home, home improvements or significant repairs. Interest on home equity loans used for personal expenses like large purchases or paying down credit card debt does not qualify for the deduction.

Mortgage Late Payment Charges and Prepayment Penalties

Mortgage-related charges, such as late payment fees or prepayment penalties, may also be deductible as part of your mortgage interest. These charges arise if you make late mortgage payments or pay off your loan early, and lenders apply penalties to compensate for lost interest income.

What’s Not Deductible?

Some expenses related to your home are not eligible for deduction. The following are common examples:

•  Mortgage Insurance Premiums
•  Homeowners Insurance
•  Interest on a Reverse Mortgage
•  Down Payments or Forfeited Earnest Money
•  Title Insurance
•  Extra Principal Payments
•  Settlement Costs

How to Claim the Mortgage Interest Deduction

To claim the mortgage interest deduction, follow these steps during tax filing season:

1. Gather Form 1098

Your lender is required to provide you with Form 1098 if you paid $600 or more in mortgage interest during the year. This form details the total interest paid and any points, and a copy is also sent to the IRS to verify your tax return. If you can’t locate Form 1098, contact your lender to obtain this information.

2. Itemize Your Deductions

Instead of taking the standard deduction, itemize your deductions to claim mortgage interest. This means listing out eligible deductions on your tax return. Make sure the total of your itemized deductions exceeds the standard deduction to benefit from this approach.

Worth noting however: In 2024, the standard deduction offers a simplified way to reduce your taxable income without the need to itemize deductions. For single filers, the standard deduction is $13,850, while married couples filing jointly can deduct $27,700. For many taxpayers, taking the standard deduction can be more beneficial, especially if their total itemized deductions—such as mortgage interest, charitable contributions, and medical expenses—don’t exceed the standard deduction amount. The simplicity of the standard deduction also saves time, as it avoids the detailed record-keeping required for itemizing, making it a more appealing option for many.

Special Circumstances for Claiming the Deduction

Even if your mortgage situation doesn’t fit neatly into the standard categories, you may still qualify for the deduction. For instance, you can still claim mortgage interest deductions in these cases:

1.  Timeshare Properties: Keep accurate records of the time spent at the property.
2.  Renting Part of Your Home: Track income and expenses related to the rental portion.
3.  Home Office: You can claim a portion of your mortgage interest based on the square footage of your home office. Use Schedule C for additional deductions.
4.  Co-Op Apartments: Your co-op must allocate a portion of interest paid toward your residence.
5.  Homes Under Construction: The home must be completed within 24 months to qualify.
6.  Destroyed Homes: If your home is destroyed in a natural disaster, you may still deduct mortgage interest.
7.  Shared Mortgage With a Partner: If you’re paying a mortgage with a former partner, you can claim your portion of the interest.

Maximize Your Tax Savings with Homeownership

Whether you’re a seasoned homeowner or looking to purchase your first home, understanding your tax benefits is essential. Always consult with a tax advisor to maximize the benefits of the mortgage interest deduction. Additionally, you can visit the IRS website for more detailed information.

If you’re ready to purchase or refinance a home, Certified Home Loans is here to assist. Contact one of our mortgage experts today for a free consultation or apply online to start your pre-qualification. Call us today: 919-510-1108

 

*** Certified Home Loans is not a certified public accountant (CPA) or qualified tax advisor. The information provided in this article is for informational purposes only and should not be considered tax advice. We strongly recommend consulting with a CPA or qualified tax professional for guidance on the deductibility of mortgage interest and other charges based on your specific financial situation. ***