Home Mortgage Interest

Interest paid on a mortgage for buying, building, or substantially improving your main or second home is deductible. The mortgage must be secured by the property and properly recorded. To benefit from the Home Mortgage Interest Deduction, you must itemize deductions (Schedule A) on your tax return. The deductible interest is subject to certain limits, as outlined below.

Eligibility Criteria:

1.

The mortgage must be secured by the property.

2.

The mortgage must be recorded.

How much of your mortgage interest actually lowers your tax depends on clearing the standard deduction — a bar a single filer usually clears and a married couple often only half-clears, as the examples below show. This discussion applies to US tax returns. Many states have slightly different rules. There are two main steps in determining how much of a tax deduction you get.

1.

How much interest is considered deductible, call this D

2.

How much of D is effective in lowering your taxes, call this E.

Interest on land you plan to build a home on isn’t deductible until construction starts. Once construction begins, you can deduct some interest, treating the home under construction as a qualified home for up to 24 months, provided it becomes your qualified residence upon completion.

Mortgage interest on a second home is deductible if it meets the same criteria as your primary residence. However, if you rent out this second home but also use it personally, there are extra rules that could affect the deductibility of mortgage interest and real property taxes.

The 2/37 haircut on step E. Starting in 2026, OBBBA (Sec. 70111) rewrote IRC §68, “Overall limitation on itemized deductions”: a taxpayer in the 37% bracket loses 2/37 of the lesser of total itemized deductions or the taxable income sitting above the 37% threshold. The arithmetic is designed so that every itemized dollar is worth at most 35 cents to a top-bracket filer, never 37 — the deduction is effectively taken at the 35% rate. Below the 37% bracket the rule does nothing. Mortgage interest, property tax within the SALT cap, and charitable gifts all take the same haircut, so a $50,000 interest bill that clears the standard deduction is worth $17,500 federally, not $18,500. The house chapter calls this the “2/37 rule” and it is the reason the effective tax rate on mortgage interest in that chapter’s examples is built from 35%, not 37%.

Read more at IRS Real Estate FAQ and IRS Pub. 936.