Many homeowners look forward to one thing during tax season: deducting mortgage interest. This includes any interest paid on a loan secured by your primary or secondary house. A mortgage, a second mortgage, a home equity loan, or a home equity line of credit are all examples of this (HELOC). Continue reading to learn more about the home mortgage interest deduction, know if can deduct it and how to claim it on your taxes this year.<\/p>\n\n\n\n
The mortgage interest deduction is an itemized deduction for mortgage interest paid. It lowers households’ taxable income and, as a result, their total tax burden. The Tax Cuts and Jobs Act limited the types of loans that qualified for the deduction and lowered the amount of principal that could be deducted.<\/p>\n\n\n\n
The mortgage interest deduction allows you to decrease your taxable income by the amount of mortgage interest you paid during the year. So, if you have a mortgage, keep meticulous records \u2013 the interest you pay on your mortgage may assist reduce your tax burden.<\/p>\n\n\n\n
As previously stated, you can generally deduct mortgage interest paid during the tax year on the first $1 million of mortgage debt for your primary home or a second home. If you bought the house after December 15, 2017, you can deduct the interest you paid on the first $750,000 of the mortgage throughout the year.<\/p>\n\n\n\n
For example, if you acquired an $800,000 mortgage to buy a property in 2017, and then paid $25,000 in interest on that loan during 2021, you can presumably deduct all $25,000 of that mortgage interest on your tax return. However, if you have an $800,000 mortgage in 2021, that deduction may be reduced. This is because the 2017 Tax Cuts and Jobs Act limited the deduction to the first $750,000 in mortgage interest.<\/p>\n\n\n\n
There is an exemption to the Dec. 15, 2017, deadline: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to have been obtained before Dec. 16, 2017.<\/p>\n\n\n\n
The interest component of your monthly mortgage payment isn’t the only sort of interest you can deduct from your tax bill. According to the IRS, there are several more categories of deductible interest to consider:<\/p>\n\n\n\n
The Tax Cuts and Jobs Act (TCJA) increased the standard deduction for single taxpayers to $12,200 and for married couples filing jointly to $24,400. The standard deduction has been increased to $12,550 for single filers and $25,100 for joint filers for the 2021 tax year. Prior to the TCJA, the standard deduction was $6,350 for single filers and $12,700 for married couples filing jointly.<\/p>\n\n\n\n
One of the aims of the TCJA was to make tax filing easier, and this massive rise makes itemizing deductions, including mortgage interest, obsolete. For many people, taking the standard deduction is significantly more tax-efficient.<\/p>\n\n\n\n
Indeed, claiming the mortgage interest deduction is only worthwhile if you have a large mortgage or two mortgages (because you have a second home). In other words, in most cases, the deduction is a gift to the wealthy. However, astute investors may be able to take advantage of this deduction break.<\/p>\n\n\n\n
The mortgage interest deduction allows you to deduct the interest paid on a home equity loan. That’s true, the same deduction rules apply to second mortgages, also known as home equity loans and HELOCs.<\/p>\n\n\n\n
You can deduct the interest paid on home equity loans or lines of credit only if you used the funds to buy, develop, or substantially improve your primary or secondary residence. Second mortgages used to consolidate debt, pay for college, or fund another financial purpose are ineligible for the mortgage deduction.<\/p>\n\n\n\n
The same monetary limits that apply to single taxpayers and married taxpayers filing separately \u2014 $750,000 and $375,000, respectively \u2014 apply to the total amount of loans secured by your primary home or second home. First and second mortgages are included.<\/p>\n\n\n\n
For example, if you’re single and have a $500,000 mortgage on your primary home plus a $300,000 HELOC, your total mortgage debt is $800,000. However, you can deduct just the interest paid on the first $750,000 of that total amount.<\/p>\n\n\n\n
A few payments you make may be considered mortgage interest. Here are a few to think about subtracting.<\/p>\n\n\n\n
This property could be a house, co-op, apartment, condo, mobile home, houseboat, or something else. However, the home will not qualify if it lacks basic living amenities such as sleeping, cooking, and toilet facilities. The property must also be declared as collateral for the loan from which interest payments are being deducted. This deduction can also be used if you secured a mortgage to buy out an ex’s part of the property in a divorce.<\/p>\n\n\n\n