Mortgage Interest Tax Deduction_ Limits and How It Works

1. Mortgage Interest Tax Deduction: Limits and How It Works Deductions are the only aspect of taxes that excites people. Tax deductions are allowable expenses that can be deducted from your taxable income, reducing your tax liability. One of the many homeowner tax deductions offered by the Internal Revenue Service (IRS) to homeowners who have a mortgage is the mortgage interest deduction. Let's understand how this valuable deduction works and how you can claim for it this year. What is the Mortgage Rate Deduction? One tax benefit for homeowners is the deduction for mortgage interest. Homeowners can reduce their tax liability by deducting mortgage interest from their taxable income through this itemized deduction. As long as they remain under IRS limits, homeowners can also claim the deduction on loans for second homes. Mortgage Interest Deduction Limit

2. The first $750,000 of your mortgage debt for your primary or secondary residence is deductible, as is the interest you paid on the loan throughout the tax year. For married couples filing separately, the cap is reduced to $375,000. Interest paid on the first $1 million of the mortgage ($500,000 if married filing separately) can be written off if you purchased the home before December 16, 2017. The IRS considers your mortgage to have been obtained before December 16, 2017, if you closed on the house before April 1, 2018, and you entered into a legally binding contract before that date to close before January 1, 2018. Example of a Mortgage Interest Tax Deduction If you took out a $800,000 mortgage in 2017 to purchase a home and paid $25,000 in interest on that loan in 2024, you will most likely be able to write off the entire $25,000 in mortgage interest on your 2024 tax return. That deduction may be somewhat lower, though, if you were to acquire a $800,000 mortgage in 2024. This is because the deduction was restricted to the interest on the first $750,000 of a mortgage by the 2017 Tax Cuts and Jobs Act. Who Qualifies for the Mortgage Interest Deduction? A primary or secondary home is qualified for a mortgage interest deduction; hence, unless there are exceptional circumstances, any other properties would not qualify. Any house, condominium, cooperative, mobile home, house trailer, boat, or other property with sleeping, cooking, and toileting facilities is considered a "qualified home" according to the IRS. Keep in mind that mortgage loans have size restrictions that may impact their deductibility. Knowing how much mortgage interest you can deduct is crucial because changes in the law, like the Tax Cuts and Jobs Act of 2017, have altered the ceiling over time. How To Claim The Mortgage Interest Deduction The process for obtaining the actual mortgage interest deduction is quite simple: 1. Initially, you will want your lender's Form 1098. The amount of interest and points you paid on your mortgage will be shown on this official tax form.

3. 2. After determining the potential amount of your deduction, compare it to the standard deduction to see whether itemizing is worthwhile. The standard deduction is $14,600 for married persons and single filers filing separately, $21,900 for heads of household, and $29,200 for married couples filing jointly for the 2024 tax year. 3. You will claim your mortgage interest deduction on Schedule A of Form 1040 if your itemized deductions exceed your standard deduction. Keep in mind that certain additional possible home-related deductions might need to be submitted on separate forms. For instance, Schedule E of Form 1040 must be used for deducting interest on rental properties. Schedule C of Form 1040 is where you will claim such deductions if your business is financed by your mortgage or if you are utilizing a portion of your house as an office. Which Loans are Eligible For The Deduction of Mortgage Interest? The mortgage interest tax deduction is available for a wide range of home loan types, including those used to purchase, construct, or renovate a residence. Second mortgages, home equity loans, and home equity lines of credit (HELOCs) might also be eligible. If the loan was secured by your property and you used the loan to purchase, construct, or renovate your home, you can also claim the mortgage interest deduction after you refinance home loan. Additional Tips for Increasing Mortgage Deductions Other home-related costs, such as property taxes, mortgage insurance premiums, and points paid on a new loan, may also be deducted in addition to mortgage interest. Points Mortgage points are just prepaid interest, according to the IRS. This implies that even if your points are deductible throughout the loan, you often cannot deduct the entire amount of them in the year that you paid them. There are, of course, exceptions to this general rule because the tax code is complex. To determine whether points can be deducted in the year of payment, the IRS specifically applies the following nine-point test:

4. 1. A primary residence must be used as collateral for the loan. 2. Points-paying must be a standard business procedure in the region where the loan is provided. 3. Your purchase didn't exceed the going rate for points in your neighborhood. 4. You choose the cash accounting approach. 5. Other typical costs like property taxes, legal fees, title fees, inspection fees, and appraisal fees were not replaced by the points. 6. You didn't borrow that money from your lender or mortgage broker, and the amount you paid at closing was at least equal to the points assessed. 7. You build or buy your primary residence using the loan on which you paid your points. 8. The points were calculated as a proportion of the mortgage's principal. 9. It must be evident from the settlement statement that the points were applied to the mortgage. Taxes on Property Real estate taxes at the state and local levels are totally deductible. Since property tax rates are set by each state and locality, they will differ based on where you live. For instance, New Jersey has a property tax rate of 2.23%, while Hawaii has the lowest rate at 0.32%. Individual localities may have slightly different rates. Property taxes typically total at least a few thousand dollars annually for the typical taxpayer. Premiums for Mortgage Insurance If your down payment is less than 20% of your principal, you must purchase private mortgage insurance. In the event that buyers are unable to fulfill their mortgage payments, it is intended to safeguard lenders. The tax deduction for PMI premiums ended in 2021, however it was still available for several years. If your PMI is applicable to a rental property, you could still be eligible to deduct it. Mortgage Interest Dedudction FAQs

5. 1. Does the mortgage interest deduction have a limit? If you're married and filing jointly, single, or the head of a household, you can deduct up to $750,000 in mortgage interest under the Tax Cuts and Jobs Act (TCJA) of 2017. The cap is $375,000 if you're married and filing separately. 2. What stops certain mortgage interest from being tax deductible? Whether the loan is secured by the mortgaged property determines whether mortgage interest is deductible. You probably won't be able to claim the deduction if you wish to deduct mortgage interest from a home equity loan or a home equity line of credit (HELOC) but didn't utilize the funds to purchase or upgrade your house. 3. What additional tax deductions are available to homeowners? Some homeowners may qualify for property tax, state income tax, or capital gains tax deductions in addition to the mortgage interest deductions. Tax credits could be an additional option to consider if you are not eligible for any tax deductions. For instance, a mortgage interest credit enables eligible homeowners to claim a credit equal to a portion of the mortgage interest they paid for a specific tax year on their tax return. 4. After refinancing your property, is it possible to deduct mortgage interest? If you refinanced your primary or secondary dwelling, you might be eligible for a mortgage interest deduction, provided that the funds were utilized to raise the home's worth. Wrapping It Up For support with submitting your 2025 tax return, speak with a tax expert or financial counselor. Depending on your loan type and financial circumstances, they can assist you in determining what to deduct and offer even more details regarding the mortgage interest deduction. Sistar Mortgage can begin the approval process if you wish to refinance your current mortgage or buy a second home. You may find out more about the tax advantages of buying real estate or refinancing from a home loan expert.

6. Ready to apply for a home mortgage and take advantage of tax benefits? Contact our mortgage experts today