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.
(Here is a refresher on how tax deductions and tax credits work.)
Table of Contents
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:
- You must have secured debt on a qualified home in which you have an ownership interest.
- 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 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 as 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
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
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).
How Does Ownership Interest Impact Who Can Claim the Home Mortgage Interest Deduction?
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.
In the following section, I’ll cover who is entitled to claim the deduction in those circumstances and give you some interesting real-world questions and answers.
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.
I gave you an introduction to the mortgage interest tax deduction and told you what’s required to claim it.
You learned about the two major hurdles you have to jump over to qualify for it:
- You must have secured debt on a qualified home in which you have an ownership interest.
- You must file your federal income taxes using Form 1040 and itemize deductions on Schedule A.
Who Can Claim Home Mortgage Interest Deduction?
We covered what a secured debt is, the types of properties that qualify for this valuable tax deduction, and other situations like what happens if you rent out your second home or have a home office.
We didn’t cover the ownership interest requirement—so that’s what I’m going to focus on in the second half of this guide. I saved it for last because it seems to be the piece that confuses people the most.
What if You Own a Home But Are Not on the Mortgage?
One of the reasons people who are eligible to claim the mortgage interest deduction don’t claim it is because they don’t get a copy of Form 1098, Mortgage Interest Statement.
Mortgage lenders are required to send out Form 1098 each year to the borrower(s) on record. It shows how much you paid in interest, mortgage insurance, and deductible points during the year.
Example – Shared Home Ownership with a Family Member
Let’s say you own a second home at the beach with your brother. The agreement you made and put in writing was that if your brother got the mortgage, you’d be responsible for some of the minor handy work and you’d each pay 50% of the mortgage.
Both your names are on the title of the property but your brother is the only one listed on the mortgage—so he’ll be the only one who receives Form 1098. But since he paid half of the mortgage payments, he’s only entitled to 50% of the mortgage interest deduction and you’re entitled to the remaining 50%.
Ideally, you should get a copy of Form 1098 from your brother to submit with your tax return. You should also:
- write a note explaining that you’re an owner of the property even though your name isn’t on the mortgage
- include your brother’s name and address as the person who did receive Form 1098
- show how much of the mortgage interest each of you paid
So, it doesn’t matter who receives Form 1098—if you own a qualified home with someone else and you paid mortgage interest (and itemize deductions on Schedule A), you can claim your share of the money-saving mortgage interest tax deduction.
What if You Own a Home But Are Not on the Mortgage or Title?
Another issue that comes up is whether or not you can claim the mortgage interest deduction when you’re not on the mortgage or on the title to a property. Here’s a question that I received:
My fiancé bought a home last year but I’m not on the title since my credit was not up to par. My fiancé does not work and I pay the mortgage. My question is if there’s any way I can benefit from this on my taxes or is it a complete loss for me?
In order to claim the mortgage interest deduction, you must have an ownership interest in the qualified property and be responsible for the secured debt. You’re not allowed to claim the mortgage interest deduction for someone else’s debt.
So the answer to the question depends on whether the fiancé considers you an equitable owner or a renter. Without being on the title of the property or having a written agreement that you’re an owner who is indebted for the mortgage, you cannot claim the mortgage interest deduction.
What Amount of Mortgage Interest Can Co-owners Claim?
If you own a home with someone else, the rule is that you can only claim the amount of interest that you actually paid. Here’s a question about this issue:
My girlfriend and I co-own a house together 50-50. Both our names are on the mortgage and we each pay half of it. Do we both have to claim equal amounts of mortgage interest when we itemize? Or can one claim all of it and the other not itemize?
The answer is that you can only claim the deduction for the interest you actually paid. So if each person paid 50% of the mortgage, each person is only eligible to deduct 50% of the interest.
However, if one person made 100% of the payments, they could claim 100% of the mortgage interest deduction.
Here’s another question:
My name is on a mortgage with my daughter-in-law. She and my son will not itemize deductions this year, but I will. Can I claim the total amount of interest even if I haven’t lived in the house? Can they take it in future years when they itemize?
The answer is that even if you’re indebted for a mortgage, you can only deduct interest for the payments you actually made.
If the daughter-in-law and son made all the mortgage payments, they are the only ones entitled to the deduction, and they can take it in any year that they itemize. Unfortunately, if they don’t itemize, no one can claim the deduction.
Important Tips for Claiming the Home Mortgage Interest Deduction
As you can see, understanding who’s eligible to claim the mortgage interest deduction can be a little tricky. Here are some final tips that can help protect you in the event of an IRS tax audit:
- If you co-own property and are not listed on the mortgage, never make monthly payments to a co-owner because that could be construed as paying rent. Instead, make payments directly to the lender so your ownership interest can’t be questioned.
- If you co-own a property but aren’t named on the deed, have your ownership interest clearly defined in a written contract.
- If you pay someone else’s mortgage debt for them, you can never deduct the mortgage interest unless you are indebted as an owner of the property.
Try a Tax Prep Service
If you are still having problems understanding exactly how to take the mortgage interest deduction you might want to consult professional help. These top tax filing services will make sure you get your full deduction.
Tax Slayer – With a long history and easy to use questionnaire, Tax Slayer can help you take advantage of all the deduction available to you.
TurboTax – They’ve been mentioned more time when it comes to taxes than any other platform. TurboTax has a clean interface and makes it very easy to get the most from your deductions.
H&R Block – With storefronts across the country, H&R Block makes it easy to file your taxes in person or from your computer.
Summary – Claiming the Home Interest Deduction
To wrap this up, you must satisfy the two criteria listed above:
- You must have secured debt on a qualified home in which you have an ownership interest.
- You must file your federal income taxes using Form 1040 and itemize deductions on Schedule A.
If you are a part owner of the home, then you will need some form of written proof stating your ownership and the amount of mortgage interest you paid during the year. Without having written proof, you may not legally be allowed to claim the home interest deduction.
If you have a more complicated situation than those listed above, you may wish to consult with a legal professional who specializes in real estate.
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Venkatraman Gopalakrishnan says
Dear Sir
I am on the property Title of my house as a joint Tenant with my son. He only pays for mortgage interest for the property. But the lender has issued 1098 on my social security number. But it is actually my son who has paid the mortgage interest on the property. He has made payments by check. Is he allowed to claim IRS mortgage interest deduction? I am asking this because 1098 has my SSN on it instead of his SSN.
Any help would be appreciated.