Tax Deductions of The Mortgage Interest

The Home Mortgage Interest Deduction allows homeowners to reduce their taxable income by the amount of interest paid on their loan, provided the loan is secured by their primary or secondary home. This deduction is highly valued as it can significantly lower the amount of income tax owed. To qualify, you must itemize deductions on your tax return, and the mortgage must be used to buy, build, or substantially improve your home. The IRS defines “substantial improvement” as any improvement that adds to the value of the home, prolongs its useful life, or adapts it to new uses.

Rules for deductions are covered in IRS Pub. 936, “Home Mortgage Interest Deduction” based on IRC §163, “Interest”.

• Under the Tax Cuts and Jobs Act of 2017(TCJA), the mortgage interest deduction is limited to interest paid on up to $750,000 of mortgage debt for single and joint filers, and $375,000 for those married filing separately. This limit was reduced from the previous cap of $1 million. Since OBBBA, this $750,000 limit is now permanent.
• These limits apply to the combined amount of loans used to buy, build, or substantially improve the taxpayer’s main home and second home.