Is mortgage interest deductible? What homeowners need to know this tax season

By the time you’re done paying off a 30-year mortgage, you’ll potentially have paid hundreds of thousands of dollars in interest to your lender. Because mortgages take so long to pay off, borrowers rack up a lot of interest along the way.

Fortunately, you can put this expense to good use by deducting it when you pay your income taxes. Here’s our guide to the mortgage interest deduction for homeowners, just in time for the 2024 tax season.

Is mortgage interest deductible?

Mortgage interest is generally deductible, yes. But you should be aware of the limits if you’re planning to deduct the interest you paid on your mortgage when you file your taxes this year.

Additionally, depending on how much you paid in interest last year, it doesn’t always make sense to take this deduction. But more on that further down.

“At one point all interest used to be tax deductible,” says Eric Bronnenkant, head of tax at Betterment.

Even credit card interest used to be deductible. But the 1986 Tax Reform Act eliminated deductions for personal interest, with one exception: home mortgage interest.

“Due to some great lobbying by the real estate industry, they also got a carve-out for home mortgage interest as an exception,” Bronnenkant says.

How the mortgage interest deduction works

Tax deductions work by lowering your taxable income, ultimately reducing the amount of taxes you need to pay in a given year. This is different from a tax credit, which is a dollar-for-dollar reduction in what you owe.

Here’s an example of a tax deduction: Say you paid $20,000 in interest on your mortgage in 2023. If your yearly salary is $120,000, you can use the mortgage interest you paid to reduce your taxable income to $100,000. This means you’ll only pay taxes on $100,000 of your income, not $120,000.

The mortgage interest deduction can only be used for a mortgage that is secured by your home.

Mortgage interest deduction limit

There’s no cap on how much interest you can deduct on your taxes when utilizing this deduction, but there are limits to how much of the loan amount can be used for the deduction.

If you closed on your mortgage after December 15, 2017, you can deduct interest paid on loan amounts up to $750,000. If your mortgage amount is larger than this, you can only deduct what you paid on the first $750,000 of that loan.

“Let’s say you borrowed $1 million, then you’d only be able to count the interest on the first $750,000,” Bronnenkant says. “In that case, you’d be limited to 75% of the interest on $1 million.”

If you got your mortgage on or before December 15, 2017, you can deduct interest paid on mortgage amounts up to $1 million.

Eligible home types

You can deduct the mortgage interest paid on your main home and one second home.

If you rent out your second home for a portion of the year, you’ll be able to deduct the interest you paid as long as you stayed in the home yourself for the greater of:

• More than 14 days
• More than 10% of the number of days that the home was rented during the year

Otherwise, it’s considered rental property, which comes with its own set of rules regarding tax deductions.

According to the IRS, a qualifying home can be a:

• House
• Condo
• Co-op
• Mobile home
• House trailer
• Boat

Eligible interest

Interest paid on a purchase or refinance mortgage can be deducted. You may also be able to deduct interest paid on a second mortgage, depending on how you used the funds.

Second mortgages include home equity loans and home equity lines of credit (HELOCs). The IRS states that if you used the money from one of these loans to “buy, build, or substantially improve” your home, you can deduct the interest you paid on these loans. Otherwise, this interest isn’t deductible.

Other costs that can be treated as mortgage interest for the sake of this deduction include:

• If you incur a charge as a result of making a late mortgage payment, you may be able to deduct that charge
• If you pay off your mortgage early and are charged a prepayment penalty, this cost may also be deductible as mortgage interest
• Prepaid interest or mortgage points can generally be deducted over the life of the loan

How to get the mortgage interest tax deduction

Figure out how much interest you paid

Your mortgage lender will send you a Form 1098 at the beginning of each year. Box 1 will tell you how much you paid in mortgage interest in the previous year.

Don’t forget to factor in all eligible mortgage interest, including interest paid on an eligible second mortgage or other costs that can be treated as mortgage interest, like late charges or mortgage points.

Decide if it’s worth it to itemize

Just because you paid a large amount in mortgage interest last year doesn’t necessarily mean taking the mortgage interest deduction is your best option.

Everyone gets the option to itemize their deductions or take the standard deduction. The standard deduction enables the average taxpayer to get a tax deduction without having to go through the trouble of keeping track of every expense that could result in a reduction of taxable income.

“When you’re doing your taxes, you have to look at what your standard deduction is and compare that to your itemized deductions,” Bronnenkant says.

For 2023 income taxes, the standard deduction is:

• $13,850 for those who are single or married and filing separately
• $20,800 for a head of household
• $27,700 for married couples filing jointly

If you think you could get a larger total deduction by itemizing, you might prefer to do that over taking the standard deduction.

When it passed in 2017, the Tax Cuts and Jobs Act nearly doubled the standard deduction amount. This, in addition to lowering the loan amount that qualifies for the mortgage interest deduction, means that fewer people are able to take advantage of this deduction, Bronnenkant says.

“The people who are most likely to currently benefit from [the mortgage interest deduction] are people who get up to that cap of the $750,000 — also people who borrowed more recently because interest rates have also gone up,” he says.

This article was written by Molly Grace from Business Insider and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].