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Understanding the Home Mortgage Interest Deduction, Part One

by Laura Adams

As host of the Money Girl podcast, I get lots of email questions from listeners. Since the beginning of the year I’ve received a steady stream of questions about claiming the Home Mortgage Interest Tax Deduction. If you’re not familiar with this deduction, it’s a big benefit for homeowners because it allows you to deduct the amount of mortgage interest you pay from your taxable income, which can substantially lower the amount of tax you have to pay.

By the way, if you need a refresher on how tax deductions work or want to learn about other tax benefits besides mortgage interest, be sure to read or listen to a previous post I wrote called How to Pay Less Tax Using Deductions and Credits.

What Is Required to Claim the Mortgage Interest Tax Deduction?

There are two major hurdles you have to jump over to be eligible to claim the mortgage interest deduction:

1.       You must have secured debt on a qualified home in which you have an ownership interest.

2.       You must file your federal income taxes using Form 1040 and itemize deductions on Schedule A.

What Is a Secured Debt for the Mortgage Interest Tax Deduction?

Let’s cover exactly what’s meant by “secured debt” first. You’ll know you’re getting a secured loan when your hand starts cramping up in the middle of the closing. That’s because the paperwork you have to sign just keeps coming! The lender is legally required to disclose all the grim details, like the fact that they’re going to take your house and sell it if you don’t pay up.

The note you sign is your promise to repay the debt and the mortgage is the agreement that secures your home sweet home to the debt. Whatever the agreement is called in your neck of the woods—a mortgage, deed of trust, or land contract—it must also be recorded in the county courthouse or adhere to any other state or local laws to qualify as a secured debt.

This is what typically happens when you take out a mortgage from an institutional lender or through a mortgage broker. However, you might not have a secured debt if you buy a home using owner financing that isn’t secured to the property.

What Is a Qualified Home for the Home Mortgage Interest Deduction?

Now let’s define what the IRS considers a qualified home when it comes to claiming the mortgage interest deduction.  It can be your main home and a second home—but not your third or fourth pad if you’re so lucky. Your main home and second home can be a single family residence, condo, cooperative, mobile home, trailer, time-share arrangement, or even a boat, as long as they have sleeping, cooking, and toilet facilities.

If you’re married and file a joint tax return, your qualified home(s) can be owned jointly or by one spouse only. If you’re married and file separate returns, you can each claim the mortgage interest for one qualified home only—unless you consent in writing that one spouse can claim the deduction for both homes.

Does a Rented Home Qualify for the Mortgage Interest Deduction?

If you have a second home and rent it out, there are special rules for whether you can deduct the mortgage interest. Here’s the deal: if you rent your second home out for the entire year it’s treated like a business and is subject to the rules for rental property (refer to Publication 527, Residential Rental Property for more information).

But if you use your second home for part of the year, it’s a qualified home where you can deduct the mortgage interest. You just have to make sure that you use the property enough. According to the IRS, you must visit your second home more than 14 days or more than 10% of the number of days during the year that the home is rented—whichever is longer.

Can You Claim the Mortgage Interest Deduction with a Home Office?

If you claim a home office in your main or second home, you have to separate the business and personal use of your home. For example, if your home office is 15% of your home, then you can only deduct 85% of your home mortgage interest. The remaining 15% of the interest could be included in your business expenses (refer to Publication 587, Business Use of Your Home for more details about how to figure a home office deduction).

What Kind of Debt Qualifies for the Mortgage Interest Tax Deduction?

There are two types of debt that qualify for this big tax break: acquisition debt and equity debt.

Acquisition debt is any secured loan you get to buy, build, or remodel a main or second home. It includes refinanced debt up to the amount of your old mortgage balance just before doing the refinance. The total amount of interest you can deduct for acquisition debt is limited to one million dollars for your main and second home (or $500,000 if you’re married filing separately).

Equity debt is any loan secured by your main or second home that you took out for a reason other than to buy, build, or remodel. It could be money you spent to start a business, pay for education, or to take a vacation, for instance. It has a much lower limit than acquisition debt for claiming the interest deduction: $100,000 (or $50,000 if you’re married filing separately).

Understanding the Home Mortgage Interest Deduction, Part Two

So, we covered all the requirements for claiming the mortgage interest deduction except the “ownership interest” part. I’ve found that that’s really the piece that trips most people up. Perhaps you own property with multiple people, are responsible for paying a mortgage even if your name isn’t on the mortgage or title, or pay someone else’s mortgage for them, for instance. Next week, in part two of this topic, I’ll cover who’s entitled to claim the deduction in those circumstances and give you some interesting real-world questions and answers.


Published or updated March 29, 2011.
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{ 5 comments… read them below or add one }

1 ross

This was the first year i was able to claim this deduction. I actually have never heard of it until recently. It was a nice surprise when my accountant explained it to me. I also got my homebuyer credit. This is the first year i’ve been happy with the outcome of my taxes.

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2 Frank Bardell

Hello,
I have a unique situation. My Mom and I own a rental property together. The home was purchased for $300,000.00. We each put $25,000.00 down. She refinanced her home and w e paid cash for the rental property. We set up an LLC and pay her mortgage form a joint account. The deed is in both our names.
Each year she files her taxes and gives me the K 1 form to give to my accountant.
Because my wife and I don’t make much, and I have deductions already that gets us all our taxes back, We don’t need the K1 form. Can my Mom take the full deduction ?
Also, I’m filing for the Pell Grant for my daughter for college. The rental is worth $300,000 and shows as being fully paid for. But my mom refinanced her home. If the house were sold today her mortgage would have to be satisfied.
So on paper it looks like I have $150,000 in assets. How do I get around this when applying for student aid ?
Hopefully you can answer my questions. Thank You, Frank

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3 Ryan Guina

Frank, your situation is very unique and complicated. I strongly recommend seeking the advice of a professional tax avisor to ensure you do everything correctly. Paying for the tax advice can potentially save you hundreds or even thousands of dollars in the long run and is well worth the expense.

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4 Ginger

My boyfriend and I have lived together for 9 yrs. 9 years ago I bought a home in my name only. Four years ago my income went down significantly. To survive I sold my boyfriend half the interest in my house. I have a notarized grant deed however did not record it. I gave him half the interest deduction and now he is being audited. I would like to know since we have the notarized grant deed giving him half equity with a date showing four years ago it was signed by a notary will that be enough to claim the deduction.

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5 Kristen

My situation does not appear to be addressed so I need some help. My brother and I have been on the deed to my fathers house for quite some time. My father passed away in July 2012 and we sold his home in July 2013. Can my brother and I each claim 50% of the mortgage interest paid on my fathers home even though it was not our primary or secondary home based upon IRS requirements?

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