Tax season is here, and that means you might be wondering about the mortgage interest rate deduction for 2023 and what will qualify. You can potentially deduct mortgage interest on your tax return, but you have to itemize and know a few other things.
The mortgage interest deduction applies to the mortgage interest you pay on the first $750,000 of your home loan debt. If you bought a house before December 16, 2017, the IRS lets you deduct interest on the first $1 million for your home loan. When you claim a mortgage interest deduction, you’re required to itemize your tax return.
How the Deduction Works
You can lower your taxable income with the mortgage interest deduction by how much you’ve paid in interest throughout the year. It’s important to keep records for this purpose if you have a mortgage, or you can request them from your lender or loan servicer.
If you’re married and filing separately, you can deduct the interest on the first $375,000; otherwise, it’s $750,000. You can deduct the interest on the mortgage for your primary residence or your second home.
If you have a mortgage and you paid $25,000 in interest during 2022, you can deduct up to that.
The 2017 Tax Cuts and Jobs Act did limit the amount of the deduction to the first $750,000 of a mortgage rather than the $1 million it was before that.
If you’re deducting the mortgage for a main home, it can be any type of property, but the home has to be the loan’s collateral. The home has to include cooking, toilet, and sleeping facilities, and if you have a mortgage obtained to buy out an ex-partner in a divorce, this does count. If you get a housing allowance from the military or through a ministry that’s nontaxable, your interest can still be deducted.
If you’re deducting the interest for a second home mortgage, the house has to be the loan’s collateral, and you don’t have to use the home to qualify for the deduction. If you rent out the second home, you have to be there for either 14 days or more than 10% of the days you rent it out.
If there are points on your loan, which are interest you prepay, you can deduct them over your mortgage’s life, or you can deduct them all at once, but you have to meet certain requirements. There are nine requirements to deduct all the points at once, with some including that the mortgage has to be for your main home, and that the points aren’t unusually high.
If you have a home equity loan and want to deduct the interest, you have to have used the money to buy, build or make substantial improvements to your home. If you got a home equity loan and used it for anything not related to your home, you can’t deduct the mortgage.
What’s Not Eligible to Be Deducted?
The things you can’t deduct include your homeowner's insurance and additional principal payments on your mortgage. You can’t deduct your title insurance, earnest money, down payments or deposits you forfeited, or interest on a reverse mortgage. Also ineligible to serve as a deduction are mortgage insurance premiums.
Claiming the Deduction
Your mortgage lender should have sent you Form 1098 in January or at the beginning of February, which will be a review of what you paid in mortgage interest and points throughout the tax year. This is also sent to the IRS, so they can match it to whatever you report on your tax return.
You’ll claim the deduction on Schedule A of Form 1040, so you have to itemize rather than take a standardized deduction.
Finally, if you received help from a state housing agency, Emergency Homeowners’ Loan Program, or Hardest Hit Fund, you might be able to deduct all of the mortgage payments you made throughout the year.
