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What Is Mortgage Interest Deduction In Real Estate?

When it comes to taxes, deductions are the only thing that gets people excited. You can lower your taxable income by claiming tax deductions for certain expenses you incur throughout the tax year.

Additionally, homeowners who have a mortgage can deduct further expenses. The IRS provides several tax deductions for homeowners, including the mortgage interest deduction. Learn more about it and how you can claim it on your taxes.

What Is The Mortgage Interest Deduction?

Mortgage interest deductions are tax incentives for homeowners. This itemized deduction allows homeowners to subtract interest they pay on a loan related to the building, purchasing, or improving their primary residence from their taxable income, which lowers their tax bill. If you stay within the limits, you can also deduct interest on loans for second homes.

How Does A Mortgage Interest Deduction Work?

With the introduction of the income tax in 1913, mortgage interest tax deductions have become popular tax deductions among Americans.

Schedule A of the 1040 tax form includes information on home mortgage interest. The mortgage interest paid on rental properties is also deductible, but this is indicated on Schedule E. Quite often, home mortgage interest is the only itemized deduction that permits taxpayers to itemize; otherwise, the remaining itemized deductions would not exceed the standard deduction. A home equity loan's interest also counts as mortgage interest.

In 2017, the Tax Cuts and Jobs Act (TCJA)  changed the deduction. For new loans, it reduced the maximum mortgage principal deductible to $750,000 (from $1 million), which means homeowners can deduct interest paid on up to $750,000 of mortgage debt. Standard deductions were also nearly doubled, so many taxpayers were no longer required to itemize.

Most of them decided to completely forgo the mortgage interest tax deduction as a result. In the first year following the implementation of the TCJA, an estimated 135.2 million taxpayers take the standard deduction.

According to estimates, 18.5 million Americans are expected to itemize in 2022, while 14.2 million will claim the mortgage interest deduction. The vast majority of homeowners in the United States do not benefit from the mortgage interest deduction because approximately 75 million mortgages are outstanding during the summer of 2022.

Are Mortgage Interest Deductions Available For All Loans?

Tax deductions for mortgage interest are available for a limited number of types of home loans. The most common are loans for buying, building, or improving your home. Mortgages are the most common loan type, but you can also qualify for a home equity loan, line of credit, or second mortgage. Mortgage interest deductions are also available after refinancing your home. To qualify for a loan, make sure it meets the previously listed criteria (buy, build, or improve) and that it is secured by the home in question.

Process of Claiming The Mortgage Interest Deduction On Your 2022 Tax Return

You can use tax forms to guide you through the filing process. It can be confusing to know which forms to fill out. Following these steps will ensure that you are getting and filing the correct tax form for your 2022 mortgage interest deduction.

Select a standard deduction or an itemized deduction.

With the standard deduction, you won't have to complete more forms or provide proof of deductions. It's more of a "no questions asked" deduction with a flat dollar amount that most people can access. For tax payments in April 2022, the standard deduction is as follows for the 2021 tax year:

  • $12,550 for single filing status
  • $25,100 for married, filing jointly
  • $12,550 for married, filing separately
  • $18,800 for heads of households

Choosing an itemized deduction will allow you to select from various deductions. These include mortgage interest, charitable donations, student loan interest, and medical expenses. To itemize your deductions, you'll need to provide receipts, records, and other documents to verify each one. Taxable income is reduced by both standard deductions and itemized deductions.

Obtain 1098 from your mortgage lender or servicer

To fill out the information about your interest payments, you'll need a 1098 Form  from your mortgage lender or mortgage servicer. In this document, you'll find information about how much you paid in mortgage interest and points in the past year. This is the proof you need for your mortgage interest deduction.

Your lender or mortgage servicer will provide you with the form before you have to pay your taxes. If you have not received it by mid-February, or if you have questions unanswered in our 1098 FAQ, contact your lender.

To receive a 1098 Form, you must have paid more than $600 in mortgage interest. Even if you paid less than $600 in mortgage interest, you can still deduct it.

Choose the Right Tax Form

To claim the mortgage interest deduction, you must itemize your deductions. You'll utilize Schedule A (Form 1040), an itemized tax form, along with the standard 1040 form since mortgage interest is an itemized deduction. Additionally, the form lists deductions for medical and dental expenses, taxes, and charity donations. The mortgage interest deduction part of the form is on line 8. It is where you'll enter the mortgage interest information from your 1098.

Schedule E (Form 1040) must be submitted for deducting rental property interest. In this form, supplemental income is reported from rental properties. In case you use a portion of your house as a home office or use mortgage funds for business purposes, you may need to file Schedule C (Form 1040 or 1040-SR). Using this, you can report profits or losses from a business you own or operate. You’ll list mortgage interest as an expense on both of these forms.

What Qualifies Under Deductible Mortgage Interest?

Mortgage Interest For Your Main Residence

Property types include houses, co-ops, apartments, condos, mobile homes, houseboats, and similar structures. The property must, however, have basic living accommodations, such as sleeping, cooking, and bathroom facilities. You must also list the property as collateral for the loan you're deducting interest from. In a divorce, you can also use this deduction if you got a mortgage to buy out your ex's half of the house.

Mortgage Interest On A Second Home

To take advantage of this tax deduction, you must list the second home as collateral for the mortgage on the home that is not your primary residence. If you rent out your second home, you must live in the house for at least 14 days or more than 10% of the days you rent it out. Only one second home may be deducted if you have more than one.

Paid Mortgage Points

Mortgage points are used to pay some of your loan interest up front and in advance when you take out a mortgage. Typically, a point costs you 1% of your mortgage amount, saving you about .25%. To qualify for the deduction, pay your mortgage points directly to the lender at closing. A deduction for points can sometimes be taken in the year they are paid. In any case, interest will be deducted ratably over the life of the loan.

Charges For Late Mortgage Payments

Charges for late payments can be deducted as interest on a home mortgage if they weren't for a specific service. You should, however, never make late mortgage payments, even though you can deduct them. Doing so can harm your credit score and can result in other penalties.

Prepayment Penalties

Some lenders charge you if you pay off your mortgage early. As mortgage interest, you can deduct a prepayment penalty. To qualify for the penalty, the loan must have been paid off early; it cannot be a service charge or additional cost incurred after taking out the loan.

Home Equity Loan Interest Rates

Equity in a home can be utilized as collateral to borrow money. Depending on your needs, you may be able to receive it in a lump sum or as a line of credit. To qualify for a home equity loan, you must buy, build, or substantially improve your home with the money from the loan. You can't deduct the interest if you use the money to pay off credit card debt or buy a car.

Interest Paid Before Selling Your Home

You can still deduct any interest you paid before you sold your home. Accordingly, if you sold the house in June, you can deduct the interest you paid from January through May or June, depending on when the last mortgage payment was made.

Mortgage Insurance Premiums

Your mortgage insurance premiums are fully deductible if your adjusted gross income (AGI)  is less than $100,000, whether you file as a single person, a couple, or as head of household. Upon reaching $100,000, you're phased out ($50,000 if you're married and filing separately). There are four types of qualified mortgage insurance: FHA MIP, conventional private mortgage insurance, USDA guarantee fees, and VA funding fees.

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