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Deducting mortgage interest
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When you buy a home, a major benefit is the tax savings you receive from the mortgage interest tax deduction.
To take this deduction, you need to itemize your mortgage interest expense using Schedule A of IRS Form 1040.
If you own a second home, you can also deduct the mortgage interest expense you pay on it. The following types of mortgage interest are deductible in full in the year paid:
- Interest on grandfathered debt. This is the interest on mortgages taken out before Oct. 14, 1987.
- Interest on mortgages taken out since Oct. 14, 1987 to buy, build or improve your home. The IRS calls this home acquisition debt. In order to qualify for the full mortgage interest deduction, total mortgage debt from these first two categories cannot exceed $1 million, for married couples filing jointly. For married couples filing separately, the limit is $500,000.
- Interest on mortgages for purposes other than to buy, build or improve your home. The IRS calls this home equity debt. Home equity debt that is eligible for a full mortgage deduction is the lesser amount of:
o $100,000 for married couples filing jointly, or $50,000 for married couples filing separately.
o The total of each home's fair market value, less the sum of grandfathered and acquisition debt.
If your mortgage interest does not fit into one of these three categories, then you cannot receive a full deduction. To learn about partial deductions, see IRS Pub. 936: "Home Mortgage Interest Deduction."
If you paid $600 or more in mortgage interest, your lender will send you Form 1098: "Mortgage Interest Statement," or a similar form, by Jan. 31. The form will show the amount of deductible mortgage interest and points for the tax year. The amount should be entered on Line 10 of Schedule A. The amount of any mortgage interest not shown on Form 1098 should be entered on Line 11.
Non-deductible items
Some expenses related to owning your home cannot be deducted from your income taxes. The IRS does not allow you to deduct the following items:
- Insurance premiums you pay for comprehensive (homeowner's) coverage, or for fire, mortgage or title insurance.
- Premiums for insurance on mortgages that are underwritten by the Federal Housing Administration (FHA).
- Closing costs you pay when you buy your home. Instead of deducting these expenses, you generally add them to the basis of your home.
- Amounts that are paid to amortize the mortgage principal.
- Amounts that are paid to as assessments for local benefits that normally improve the value of your home, such as new sidewalks or sewers. Instead, the IRS requires you to also add these costs to your basis.
For more information on nondeductible expenses, see IRS Pub. 551: "Basis of Assets" and IRS Pub. 530 : "Tax Information for First-Time Homeowners."
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