Buying a home is a major financial commitment, and the mortgage interest deduction can help reduce the costs of homeownership. This deduction allows you to reduce your taxable income for the year, which in turn can reduce the amount of taxes you have to pay. You can deduct interest on your main home, second home, and even other homes, such as new homes, as long as you and the home meet the eligibility requirements set by the IRS. Points can also help you lower your mortgage rate and are usually deductible, but they're a special case. The IRS considers points to be interest that you pay in advance, and you are generally not allowed to deduct all of the points during the year you pay them.
Instead, you can divide the value of the points by the number of years of your loan term and deduct a portion each year. However, you will have to meet some requirements, such as having a loan term of 30 years or less and not having an excessive amount of points. You may be entitled to deduct all your points at once if you meet a different set of requirements. In order to qualify for the mortgage interest deduction, there are some requirements that must be met. The mortgage must be for your main home or main residence and your down payment, escrow, and other funds brought at closing must have been equal to or greater than the points collected.
The points must have been calculated as a percentage of the principal of the loan and you cannot have more points than usual where you live, among other conditions. If you qualify to deduct all your points during the year you paid them, you decide whether to do so or spread the deduction over the life of the loan. The amount you'll save depends on the tax bracket you're in, but it'll be less than the dollar amount of the deduction. Deductions are different from a tax credit, which would directly reduce your taxes based on the exact value of the credit. Some tax credits are even refundable, meaning you could get money back - something that never happens with a deduction. A home may qualify even if it is not a conventional single-family home.
Condominiums and co-ops are eligible, as are mobile homes, trailers, and houseboats. The house must have a cooking space, a bathroom and bedrooms. Generally, only the part of your home where you live will be considered qualifying housing when you deduct mortgage interest. If you rent part of your home or use part of it as an office, you may need to evaluate and divide the costs to see what part of your home qualifies for the deduction under IRS rules. You can usually decide that a property is your second home, even if you don't spend time there.
But if you sometimes rent your second home to other people, then you have to live in it more than 14 days a year, or more than 10% of the number of days you rented it if it's a longer period. You can't get the mortgage interest deduction on more than two properties, so if you own more homes, you'll need to designate just one as your second home. Usually, you should stick with that decision, but there are some cases where you can change your second home - for example if you buy a new home or if you sell your original second home. A newly-built home that is still under construction may also qualify for the mortgage interest deduction. You can get this deduction for up to 24 months starting from or after when construction begins - however this only works if the house is going to qualify for the deduction once it's ready to be lived in.
So for example, if you're building a house to rent it full time then it won't qualify once construction is finished. Form 1098 shows how much you paid in mortgage interest and mortgage insurance. If you bought a main home during the year then indicate any points that were paid. It also includes other details such as origination date of your mortgage loan and remaining balance. Generally all interest and points on Form 1098 are deductible but there are exceptions. In some situations not all of the interest or deductible points that were paid appear on the mortgage servicer's statement so it's important to read instructions carefully or work with a professional tax preparer or financial advisor to see exactly what can be deducted.
The mortgage interest deduction is added to all other deductions then entered on line 12a of Form 1040 or 1040-SR. Deducting mortgage interest can ease some of the burden associated with being charged significant amounts of interest - while tax savings will be only a fraction of what was paid it can still make repaying loans easier. Orchard Home Loans searches for best rates so say goodbye to having to sell your house before buying another - our FREE guide explains how it works.
