Approximately 11.5 million U.S. homeowners claimed a mortgage interest deduction last year – and the IRS allows you to deduct interest on up to two homes (your primary residence and one additional qualified home) under current rules.
As a homeowner or tax professional, it’s crucial to navigate these rules correctly to maximize tax benefits and avoid costly mistakes.
- 🔥 Exact number of homes you can claim for the mortgage interest tax deduction (and why the IRS limits it)
- 🔥 2023 vs 2024 tax laws – key differences under the Tax Cuts and Jobs Act and current IRS guidelines
- 🔥 Primary residences vs. second homes vs. rentals – how deductions vary for vacation homes, rental properties, and mixed-use scenarios
- 🔥 Critical IRS rules & forms – Schedule A, Form 1098, the 14-day rental rule, SALT deduction, and IRS Publication 936 explained in plain English
- 🔥 Expert tips and pitfalls to avoid – itemizing vs. standard deduction, loan limit traps, refinancing impacts, and recent legal rulings every homeowner should know
IRS Rules: Deducting Interest on One, Two, or Multiple Homes
One Home (Primary Residence)
If you have a single home that you live in as your main residence, the mortgage interest on that loan is generally deductible as long as you itemize your deductions. The IRS considers this your primary home (the place you live most of the time). Interest paid on a mortgage secured by your primary residence qualifies for the home mortgage interest deduction, up to certain loan limits (discussed later). For most homeowners with one mortgage, this means you can deduct all the interest you paid in the year, provided it’s a secured loan on your house and you file an itemized return on Schedule A of Form 1040.
Second Home (Vacation or Secondary Residence)
The IRS also allows mortgage interest deductions on one additional home besides your primary residence. This could be a vacation house, a cabin, a condo, or any other qualified second residence you choose. Importantly, you don’t actually have to live in the second home year-round or at all – you just need to designate one eligible property as your second home for the tax year. If you own two homes, you can deduct the interest on both the primary and the second home’s mortgages (again, subject to total debt limits).
However, if you rent out your second home for part of the year, you must use it sufficiently yourself for it to count as a personal residence. The IRS’s 14-day / 10% rule applies: you need to use the home for more than 14 days in the year (or more than 10% of the total days it’s rented at a fair rental, whichever is longer) for it to qualify as a second home. As long as you meet that personal-use threshold (or don’t rent it out at all), your vacation home’s mortgage interest remains deductible just like on a primary home.
However, if you rent out your second home extensively and don’t meet the personal-use minimum, the IRS will treat that property as a rental rather than a second home (more on rental rules later). In most typical cases, though, a vacation home that you use personally a reasonable amount will qualify as your second home, and the interest is deductible accordingly.
More than Two Homes
What if you own three or more houses for personal use? The tax code draws the line at two. You can only treat one property as your main home and one as a second home in any given tax year. Any mortgage interest paid on a third, fourth, etc. personal residence is considered personal interest, which is not deductible on your federal return.
In other words, if you have three homes that you use personally (and not as rentals or business properties), you’ll have to pick which one counts as your “second home” for purposes of deducting interest. The interest on the extra home(s) beyond those two cannot be deducted on Schedule A. (There is a workaround if the third home is converted to a rental or used for business/investment purposes – we’ll cover that later – but purely personal-use third home interest is off-limits for deduction.)
The IRS does let you change the home you treat as a second home from year to year in certain situations. For example, if you sell your second home or your main home, you can designate a new second home in the same year. Or if your former main home becomes a vacation property, you could start treating it as the second home once it’s no longer your primary residence. The flexibility is there, but at any point in time you’re still capped at two personal residences counting toward the mortgage interest deduction.
What counts as a “home”? For these purposes, a home isn’t limited to a traditional house. The IRS defines a qualified home broadly – it can be a house, condominium, cooperative apartment, mobile home, boat, or similar property – as long as it has sleeping, cooking, and toilet facilities and is secured by a mortgage.
So a houseboat or camper could qualify as your second home if it meets those criteria and you designate it as such. The key is that the loan must be secured by the home itself (collateralized by the property). Unsecured loans or personal lines of credit used to buy a home generally won’t qualify for the home mortgage interest deduction.
Comparison of Deduction Scenarios: Here’s a quick look at how the mortgage interest deduction works in the three most common scenarios for homeowners:
| Scenario | Deduction Treatment |
|---|---|
| Single primary home | Interest on the mortgage is deductible on Schedule A (up to loan limit), if you itemize. |
| Primary + one second home | Interest on both homes’ mortgages is deductible (combined loan limit applies). Second home must meet personal-use criteria if rented out part-time. |
| Rental or investment property | Not deducted on Schedule A. Instead, interest is deducted as a rental business expense on Schedule E (no two-home limit). Personal use must be minimal to treat it as a full rental for tax purposes. |
As the table shows, you get to write off interest for your main home and one other personal home through itemized deductions. Additional properties can still provide a tax break, but only if they’re treated as rentals or business investments (in which case the interest is deducted elsewhere on your tax return, not as a personal itemized deduction).
Mortgage Debt Limits Under the Tax Cuts and Jobs Act (Loan Cap: $750k vs. $1M)
Claiming the mortgage interest deduction isn’t just about the number of homes – it’s also about the size of your mortgage debt. The federal tax law imposes limits on how much mortgage debt can generate deductible interest. Currently, for 2023 and 2024, the general rule is: interest on up to $750,000 of home acquisition debt is deductible. This means you can deduct interest paid on mortgage principal up to $750k (for a combined total of your eligible loans). If your mortgages exceed that, a portion of the interest will be non-deductible. This limit is a key change that came from the Tax Cuts and Jobs Act (TCJA) of 2017, which took effect starting with the 2018 tax year.
- $750,000 Limit (Post-2017 Loans): Home loans taken out after December 15, 2017 are subject to the lower $750,000 cap on mortgage debt for interest deduction ($375,000 if married filing separately). In practical terms, if you bought or refinanced a home in 2018 or later, you can only deduct the interest on the first $750k of that loan’s balance. Any interest attributable to loan amounts above that isn’t deductible. For example, if you took a $900,000 mortgage in 2022 on a new home, only the interest on the first $750,000 of that debt is deductible. If you paid $40,000 of interest in a year on that loan, roughly 83% of it would be deductible (because $750k is about 83% of $900k) and the remaining 17% of interest would be disallowed.
- $1 Million “Grandfathered” Limit (Older Loans): A higher limit applies if you have what the IRS calls grandfathered or prior acquisition debt. Mortgages that were originated on or before December 15, 2017 fall under the old rule: you can deduct interest on up to $1,000,000 of principal ($500,000 if married filing separately). So if you’re still paying off a home loan from say 2015 or 2016, you may deduct interest on up to $1 million of that loan. (There was also an additional $100,000 allowance for home equity debt under pre-2018 law – more on home equity next.) The TCJA did not take away deductions for existing loans, so those higher limits were “grandfathered” in. For anyone who was under contract by the end of 2017 to buy a home (and closed by April 2018), the law treated that mortgage as incurred prior to the cutoff, allowing use of the $1M limit.
It’s important to note these limits apply to your total qualified mortgage debt across both your first and second home. If you have two mortgages – say a $500k loan on a primary home and a $400k loan on a vacation home (total $900k) – and both loans were taken out after 2017, you’re $150k over the $750k cap. In that case, you cannot deduct the interest on the excess $150k portion of debt. The IRS requires you to apportion the interest and only deduct the percentage attributable to $750k out of the $900k total. On the other hand, if one or both of those loans is older (grandfathered under the $1M rule), you might be able to deduct more – up to the old $1 million combined limit (and potentially up to $100k of home equity debt as well, if that was in play).
Married Couples and Debt Limits: The limits above are per tax return. If you are Married Filing Jointly, you get the full $750k (new law) or $1M (old law) combined limit as a couple. If you file as Married Filing Separately, each spouse can only deduct interest on up to half those amounts (so $375k each under current law). Notably, if you co-own a home with someone you’re not married to, each of you is generally allowed to deduct interest on up to $750k of debt individually.
In fact, a famous tax court case (Voss v. Commissioner) clarified that unmarried co-owners are each entitled to the mortgage interest limits per taxpayer. This means two unmarried people who jointly buy a pricey house could potentially deduct interest on a combined $1.5 million of mortgage debt ($750k cap per person), whereas a married couple would be capped at $750k total for that same property. (Of course, you can only deduct the interest you actually paid and are legally liable for – you can’t both deduct the same interest – but the debt limit itself applies per taxpayer for unmarried owners.)
Home Equity Loans and HELOCs: The TCJA also changed the treatment of home equity debt. Prior to 2018, you could deduct interest on up to $100,000 of home equity loans or lines of credit, even if you used the money for personal expenses (like paying off credit cards or tuition).
That deduction was on top of the $1M acquisition debt limit. From 2018 onward, interest on home equity loans is only deductible if the loan proceeds were used to “buy, build, or substantially improve” a qualified home – and even then it counts toward the applicable $750k/$1M total limit, rather than being a separate add-on. In short, there is no longer a separate tax deduction for interest on home equity debt that’s used for personal or non-home purposes. Always remember: to be deductible, the home equity loan must be secured by your home and used to improve or acquire a home.
For example, if you take a $50,000 HELOC on your house to remodel your kitchen, the interest can be deductible (the debt is used for home improvement). But if you took that same loan to buy a car or pay for a vacation, the interest would not be deductible. And if you already have $750k in primary/secondary home mortgages, any interest on an additional home equity loan would be nondeductible because you’re over the cap. Always keep documentation of how you use any home equity loan funds, in case you need to show it qualified.
Planning Tip: If you refinance or take out new loans, be mindful of these limits. The IRS doesn’t prorate the limit per home – it’s your combined mortgage balance that matters. To maximize your deduction, avoid borrowing above these thresholds if you can, or be aware that any interest on debt beyond those limits won’t be deductible.
Also note that current law (with the $750k cap and $10k SALT cap) is scheduled to sunset after 2025. If Congress does nothing, the old rules ($1 million mortgage cap, etc.) will return in 2026 – but lawmakers could extend or change the law before then. In the meantime, plan under the assumption that the current limits remain in place, and keep an eye on legislative developments as 2025 approaches.
Itemizing vs. Standard Deduction: Will Your Mortgage Interest Matter?
Before you get too excited about deducting all your mortgage interest, remember that you only benefit if you itemize deductions. In lieu of itemizing, taxpayers can take the standard deduction, a fixed amount that most people claim by default. The TCJA dramatically raised the standard deduction, which means far fewer people itemize now.
For 2023, the standard deduction is $13,850 for single filers (and for married individuals filing separately), $27,700 for married filing jointly, and $20,800 for head of household. In 2024, those amounts increase to $14,600 (single), $29,200 (joint), and $21,900 (HOH).
This means that unless the total of all your itemizable expenses – including mortgage interest, property taxes, state income or sales taxes, charitable contributions, medical expenses, etc. – exceeds those thresholds, you won’t actually get any tax benefit from your mortgage interest. For many homeowners with only a small mortgage or those in lower-tax areas, the standard deduction provides a larger write-off than itemizing would.
For example, a married couple in 2024 would need over $29,200 in combined deductions to beat the standard deduction. Suppose they pay $8,000 in mortgage interest and $8,000 in property taxes – that’s $16,000, which is well below $29,200, so even though those expenses are technically deductible, they’d be better off taking the standard deduction. In that case, none of their mortgage interest (or property tax) actually reduces their federal tax bill. This is a common scenario now, especially in parts of the country with moderate home prices and relatively low property taxes.
State and Local Tax (SALT) Cap: Another factor is the SALT deduction limit. The IRS allows you to deduct state and local taxes (including property taxes and either income or sales taxes) as part of itemized deductions – but since 2018, there’s a $10,000 cap on the total SALT deduction. Owning multiple homes often means paying a lot in property taxes, but no matter how much you pay, you can only deduct up to $10k of those taxes on your federal return.
This effectively limits the extra itemized benefit of a second (or third) home’s property taxes. For instance, if you already hit the $10,000 SALT cap with your primary residence’s property tax (plus state income tax), then the property taxes on your vacation home won’t be deductible federally. The SALT limitation, combined with the larger standard deduction, has made it harder for many homeowners to itemize at all. It’s something to consider: even though you can deduct mortgage interest on two homes by law, in practice you might find it only helps if you have enough total deductions to surpass the standard deduction threshold.
When Itemizing Pays Off: In general, the mortgage interest deduction is most valuable for those with large mortgages (hence paying significant interest) and in higher income tax brackets, especially when combined with other deductions.
If you bought an expensive home recently (incurring a big loan) or you own property in a high-tax state (with hefty property taxes, subject to the SALT cap) or you make substantial charitable donations, you’re more likely to exceed the standard deduction and see a tax benefit from itemizing. On the flip side, if your mortgage is modest or nearly paid off, or you live in a low-tax state, you may find you can’t itemize anymore – meaning the mortgage interest deduction provides no actual savings unless something tips you over the threshold in a given year.
(One strategy some taxpayers use is to “bunch” deductions in alternating years – for example, pay two years’ worth of property taxes or charitable contributions in one calendar year – to make itemizing worthwhile in that year, and take the standard deduction in the next. While you can’t easily bunch mortgage interest (short of prepaying interest, which generally isn’t feasible), combining it with other bunched deductions can occasionally make a difference.)
Rental and Mixed-Use Properties: Different Rules Apply
So far we’ve discussed homes used by you (the owner) for personal purposes. But what if you have a property that’s rented out or used partly as a rental and partly by you? The tax treatment of mortgage interest changes in these cases.
Pure Rental Properties: If a home is rented out full-time (and you do not use it personally at all during the year), it’s not considered a “qualified home” for the personal mortgage interest deduction. However, the interest is still deductible – just not on Schedule A. Instead, you will deduct the mortgage interest on Schedule E (the form for rental income and expenses) as a business expense against your rental income. There’s no limit of two properties in this context. For example, if you own three rental houses plus your primary residence, you can deduct the interest on the primary home (on Schedule A, if you itemize) and also deduct interest on all three rental property loans (on Schedule E) against the rental income from those properties.
The $750k loan cap doesn’t apply to business or rental property interest – that limit is specifically for the personal itemized deduction on “qualified residence” loans. (Do note, extremely high-earning landlords may face a separate business interest limitation under TCJA, but most small rental owners are exempt via the real estate trade/business exception. This is a complex area, but generally, typical landlords can fully deduct their rental mortgage interest.)
Vacation Home Rentals (Mixed Use): The tricky part comes when you have a second home that you use personally and rent out part of the time. This is a common scenario for vacation properties – for instance, you might rent out your ski cabin on Airbnb on weeks you’re not using it. The IRS has rules to determine whether such a property is treated as a personal residence or a rental property for tax purposes:
- If you use the home enough for personal purposes, it’s considered a personal residence (and thus eligible for mortgage interest deduction on Schedule A, as your second home). “Enough” generally means more than 14 days in the year or more than 10% of the days it’s rented, whichever is longer. In this case, you can deduct the mortgage interest on that home on Schedule A (within the normal limits), and you will also report the rental income and allocate rental expenses on Schedule E.
- You’ll split the expenses between personal and rental use based on time or usage (for example, if it’s rented half the year and you use it half, you’d allocate interest and other costs 50/50 between Schedule A and Schedule E). The portion of interest attributable to personal use is deducted on Schedule A, and the portion for rental use is deducted on Schedule E.
- If you rent out the home a lot and your personal use is minimal, then for tax purposes the home is considered a rental property (not a second home) that year. In practice, that means none of the mortgage interest is deductible on Schedule A, because the property isn’t counted as your personal residence in the eyes of the IRS. Instead, all the mortgage interest can be taken on Schedule E against your rental income. You essentially treat the home like any other rental business asset.
- The benefit here is that the two-home limit and $750k cap do not apply in this scenario – interest is a fully deductible rental expense regardless of loan size. The trade-off is that you’ve lost the personal deduction, but presumably the extensive rental income makes that a reasonable outcome. (Keep in mind, if your rental expenses including interest exceed your rental income, you may hit passive loss limits – those losses could be suspended if you’re not a real estate professional. That’s beyond our scope, but it’s something to be aware of with heavily rented properties.)
In summary, mixed-use vacation homes require careful tracking of days. To preserve the mortgage interest deduction on a second home that you also rent out, you need to personally use the home enough each year. If you rarely use it yourself, you might actually get a better overall tax result by treating it as a rental property (since you can still deduct the interest on Schedule E and you’ll be generating rental income). But be sure to follow the IRS’s day-count rules and report appropriately. You can’t double-dip the interest deduction – it’s either going to go on Schedule A or Schedule E (or be split between them), not both.
Third Home as a Rental: Let’s connect this back to the “more than two homes” issue. Suppose you have a primary home, a vacation home, and a third home that you don’t use much – maybe an extra house you inherited or a property in another state. If you leave that third home for personal use only, its mortgage interest is non-deductible (because it’s beyond the two-home limit). But if you decide to rent out that third home, then it’s no longer counted as a personal residence; it becomes a rental property for tax purposes. In that case, you can deduct the interest – not on Schedule A, but on Schedule E against the rental income.
In practice, this means someone with multiple properties might choose to rent out any homes beyond their second in order to get some tax benefit from the interest (in the form of deductible business expense) rather than having the interest be completely nondeductible. Of course, doing so also means dealing with tenants and reporting rental income, so it’s not purely a tax decision – but it’s a key consideration.
The tax code essentially says: interest on more than two personal homes is out, but interest on rentals is in (subject to the normal rules of rental profits/losses). Strategically, if you’re fortunate enough to own three or more homes, you might plan to use two for yourself and treat the others as rental or investment properties, thereby preserving the interest deduction on all your mortgage debt in one form or another.
Refinancing and Mortgage Changes: Impact on Your Deduction
Refinancing your mortgage or taking out a second loan on your home can also affect your interest deduction. Here are some key points to understand:
Refinancing an Existing Mortgage: When you refinance your home loan (i.e. replace it with a new loan), the interest remains deductible as long as the new loan meets the same criteria – it’s a loan secured by your qualified home and you stay within the debt limits. Refinancing does not reset the clock on your loan’s original acquisition date for purposes of the $750k vs $1M limits. In fact, if you don’t increase the principal (beyond what you owe plus closing costs), the refinanced loan is treated as a continuation of the old loan.
For example, if you have a $400,000 balance remaining on a 2015 mortgage (grandfathered under the $1M limit) and you refinance that $400k in 2024, the new loan can still be treated as grandfathered debt up to that $400k amount – meaning you keep the benefit of the higher $1M debt limit for that portion of your loan.
Where you can get into trouble is when you cash out or increase the loan balance during a refinance. Any additional debt that wasn’t part of the original mortgage and that isn’t used to buy, build, or improve your home is not “acquisition debt” and thus its interest is not deductible. So if you refinance and take out extra cash to, say, invest in stocks or pay off credit cards, the interest on that extra portion of the loan is personal interest (not deductible). Even if you use the cash for something quasi-responsible like student loans or a car, it still doesn’t count as home acquisition or improvement – so no deduction for that interest.
Example: You owe $300,000 on a mortgage from 2010 and decide to refinance in 2023 for $500,000, taking $200,000 cash out (perhaps to consolidate other debt). Your original $300k remains “acquisition debt” tied to the home, so interest on that portion is still deductible (and because the original loan predates 2018, it falls under the $1M limit). But the extra $200k is new debt not used for the home, so its interest is not deductible as mortgage interest. In effect, 60% of your new loan’s interest would be deductible and 40% would not.
If instead you took that $200k cash out and used it to build an addition or substantially renovate your home, then it would count as home acquisition debt (home improvement). However, because that $200k was newly incurred after 2017, it falls under the $750k cap. So whether that interest is fully deductible depends on your total loan balances. In this example, your total loan is $500k which is under $750k, so all the interest could be deductible. But if your refinance was larger and pushed you over $750k total new debt, you’d have to apply the limit.
Home Equity Lines of Credit (HELOCs): If you have a home equity loan or line of credit and you refinance it into your main mortgage, the same principles apply – trace how the funds were used. Interest on any portion of a loan that was used for non-qualifying purposes (not for home purchase or improvement) remains non-deductible. When refinancing, many people roll a HELOC used for home improvements into the new loan; that’s generally fine (it’s still acquisition debt).
But if you rolled in a HELOC that was used for, say, paying off a credit card, you’ve essentially mixed some non-deductible debt into your mortgage. You’d need to prorate the interest in that case or keep the accounts separate. The IRS’s Publication 936 provides worksheets for allocating interest if you have a mix of deductible and non-deductible home debt – definitely consult that if you’re in a gray area.
Mortgage Points and Refinance Costs: One more thing – if you paid points (prepaid interest) on a new mortgage, those points may be deductible too. When you purchase a main home, points are often fully deductible in the year paid (if certain criteria are met). On a refinance, points generally have to be deducted over the life of the loan (amortized). If you refinance again or pay off the loan early, any remaining undeducted points usually become deductible at that time. This is a special case of interest deduction that can add a bit of extra tax benefit when you get a new loan.
Takeaway: Refinancing can still allow you the mortgage interest deduction, but be mindful of how you handle the loan. Keep your loan paperwork so you know what portion of the new loan is old acquisition debt versus new debt. If you keep the loan balance the same or lower, your interest deduction should remain intact (within the applicable limits). If you borrow more, consider how that money is used – and remember you might not get to deduct interest on the cash-out portion unless it’s for home improvements. Always adjust your deductions accordingly after a refinance (don’t just copy last year’s numbers without recalculating if your loan changed).
Claiming the Deduction: Forms, Documentation, and Best Practices
Once you’ve determined you can deduct your mortgage interest, how do you actually claim it? Here’s a step-by-step overview:
- Form 1098 – Mortgage Interest Statement: Each year, your mortgage lender (or loan servicer) will send you a Form 1098 by January 31. This form reports the total interest you paid on that mortgage during the previous year (in Box 1), along with other related items like points (Box 6) or any mortgage insurance premiums (Box 5). If you have multiple mortgages (for example, one on your main home and one on a second home), you’ll receive a separate 1098 for each loan. Gather all of these forms – they are the starting point for your deduction.
- Schedule A – Itemized Deductions: To claim the deduction, you’ll need to file Schedule A (Form 1040) and enter your mortgage interest on the appropriate line (line 8 on the 2023 Schedule A). If you have a straightforward situation (one or two homes, loans within the limit, no home equity complications), you can usually just total up the interest from your Form 1098s and put the sum on Schedule A. Include any deductible points as well (the Schedule A instructions explain where to put points – often on the same line or the lines below for home mortgage interest). Remember, this only helps you if you’re itemizing rather than taking the standard deduction.
- If You Exceed the Loan Limit: If your combined mortgage balances are high enough that the $750k (or $1M) limit comes into play, the IRS expects you to calculate the allowable interest. Your lenders won’t do this for you – they report total interest paid, and it’s up to you to only deduct the portion that’s deductible. Publication 936 includes a worksheet for this calculation.
- In essence, you figure out the average balance of your loans, determine your qualified loan limit, and then prorate the interest. It’s a bit of math, but it ensures you don’t over-claim. Keep the worksheet or calculation in your records in case of an audit. (If all your loans are well under the limit, you can skip the worksheet – 100% of your interest is deductible. It’s when you exceed the cap that you need to compute the ratio of allowed interest.)
- Documentation and Records: Maintain good records to support your deduction. This means keeping the Form 1098s from lenders, closing statements from any home purchase or refinance (these show loan amounts and points paid), and records of how you used any loan proceeds (especially for home equity loans or cash-out refis). If you’re deducting interest on a second home, be prepared to show that it qualifies – for instance, if you rented it out, keep a log of how many days it was rented vs. used by you (to satisfy the personal use rule).
- For rental properties, you should track all income and expenses, including interest, in case the IRS questions your Schedule E. And if you co-own a property with someone other than your spouse, keep evidence of who paid how much of the interest (e.g. cancelled checks or bank statements), since each of you can only deduct the interest you personally paid.
- Statements Provided by Your Lender: Typically, Form 1098 covers this, but be aware of special cases. For example, if you assumed a loan or the loan was sold to another servicer mid-year, you might get two separate 1098s splitting the year’s interest. Or if you pay off a loan, the final year’s 1098 might come from the lender with a slightly unusual timing (like they might send it early). Make sure the interest reported matches your payment records. If there’s a discrepancy, reach out to the lender for clarification or a corrected form.
- Where to Get Help: The IRS Publication 936 (Home Mortgage Interest Deduction) is the official guide to these rules, with lots of examples and detailed definitions. Tax software can also guide you through entering mortgage interest and will prompt you for needed info (like if you have loans over the limit, etc.). If you have a complicated situation – say, multiple properties, partial rentals, or refinances – consider consulting with a tax professional who can ensure you’re calculating everything correctly. The key is to claim every dollar of deduction you’re entitled to, without overstepping and risking an IRS notice.
Common Pitfalls and Mistakes to Avoid
Navigating mortgage interest deductions can be tricky. Here are some common pitfalls to steer clear of:
- Not Itemizing When You Should: This may sound basic, but you can only deduct mortgage interest if you itemize deductions. Some taxpayers miss out by assuming the standard deduction is their only option, even in years where their itemized expenses (including interest) actually exceed it. Always compare – especially if you bought a home or paid a lot of interest/property tax in the year, you might benefit from itemizing.
- Trying to Deduct Interest on Too Many Homes: Remember, interest on a third (or fourth, etc.) personal home is not deductible. A classic mistake is new homeowners who perhaps inherit an old family home or keep a former residence as a personal vacation spot, and then attempt to deduct interest on all three properties. The IRS will disallow the excess. If you have more than two homes and you’re not renting the extras, know that only two loans’ interest can be written off. (Consider converting additional homes to rentals if you want some deduction benefit, as discussed.)
- Insufficient Personal Use of a “Second” Home: If you’re calling a property your second home but you actually rented it out most of the year, you risk the IRS reclassifying it as a rental property (thereby disqualifying the Schedule A deduction). For example, using your lake house 10 days in a year but renting it out for 120 days won’t cut it – that’s a rental property in the IRS’s view, and you shouldn’t be deducting that interest on Schedule A. Plan your personal use to exceed the greater of 14 days or 10% of rental days if you want to maintain second-home status.
- Deducting Non-Qualifying Interest: Not all interest that homeowners pay is tax-deductible. Common items that get mistakenly deducted include: interest on unsecured loans used to buy a home (the loan must be secured by the home to qualify), interest on home equity loans used for personal expenses (post-TCJA, those don’t qualify), and private mortgage insurance (PMI) premiums (which were deductible for a while but are not deductible for 2022 onward under current law). Make sure you’re only deducting interest on loans secured by a qualified home and used for qualifying purposes. Carve out any portion of interest that doesn’t meet the rules.
- Forgetting to Split Interest After a Refinance or Sale: In the year you refinance or sell/buy a home, you might have multiple loans or partial-year interest amounts. Be careful to deduct only the interest for the time you actually had the loan. You may have one Form 1098 from your old lender and another from the new lender after refinancing – be sure to add them together. If you sold a home and bought a new one in the same year, you’ll have interest from both mortgages to sum up (subject to the combined limit). Don’t overlook points you paid on a purchase (deductible immediately) or any remaining points on a prior loan that you paid off (deductible in the payoff year). Conversely, don’t deduct interest that was actually paid by the buyer of your home (if you sold and they took over interest from the closing date on).
- Co-owner Confusion: If you co-own a home with someone who isn’t your spouse (say, partners, siblings, or friends co-buying a house), decide how you are splitting the interest and stay consistent. Each of you can only deduct the portion of interest that you actually paid. The Form 1098 might be issued to only one of you (often the first person on the mortgage). That doesn’t mean that person gets to deduct 100% if you both contributed. You might need to attach an explanation to your return if you’re deducting an amount different from what the Form 1098 shows in your name, stating that the total interest was split with another owner. Communication and record-keeping between co-owners is key here.
- Neglecting State Tax Differences: Don’t assume your federal deduction situation is identical at the state level. States often have their own rules for itemized deductions on state income tax returns. For instance, California allows mortgage interest deductions up to $1,000,000 of debt (it did not conform to the federal $750k cap for state taxes), and it even allows up to $100k of home equity debt interest. Meanwhile, Massachusetts doesn’t allow a deduction for mortgage interest on the state return at all. Other states require you to itemize federally in order to itemize on the state, or have various add-backs and limits. So, check your state’s tax guidelines. You might be able to deduct more (or less) on your state return than on your federal, depending on local law.
- Missing the Itemize/Standard Switch: Some homeowners continue to itemize out of habit even when the standard deduction has become larger than their itemized total. This isn’t exactly a compliance mistake (the IRS doesn’t mind if you take the standard or itemize, whichever yields less tax, oddly enough), but it’s a financial mistake – you’d be paying more tax than necessary. Each year, especially after major changes like paying off a mortgage or the SALT cap kicking in, re-evaluate whether you should itemize. If your mortgage interest and other deductions drop below the standard deduction, accept it and take the standard (even if you mentally miss writing off that interest explicitly).
- No Documentation: Finally, a general pitfall is failing to keep proof. Normally, claiming mortgage interest is routine and doesn’t raise red flags. But if you happen to get audited or the IRS sends a notice, they might ask for verification of the deduction. If you’ve lost your Form 1098s or can’t show you were entitled to claim interest for a property (say, if the IRS questions a second home or how you split interest with a co-borrower), you could end up having the deduction disallowed. Keep those forms and related docs for at least a few years. It’s also wise to keep a copy of your closing disclosure or settlement statement for any property purchase or refinance – these show the loan amount, points, and other relevant info that can come in handy if questions arise later.
Pros and Cons of the Mortgage Interest Deduction
Is the mortgage interest deduction truly a boon? It can be, but it’s not equally beneficial to everyone. Here’s a quick look at some pros and cons:
| Pros | Cons |
|---|---|
| Lowers your taxable income by allowing you to deduct interest paid, potentially saving you thousands of dollars in taxes. | Only helps if you itemize – many homeowners see no benefit if the standard deduction is larger than their itemizable expenses. |
| Encourages homeownership and can ease the cost of financing a home, especially in the early years of a mortgage when interest is a big portion of payments. | The benefit is capped: you can only deduct interest on up to $750k of new mortgage debt (or $1M for older loans), so owners of very expensive homes or big mortgages beyond that get no deduction on the excess. |
| Allows a deduction for interest on a second home, effectively subsidizing vacation properties or dual homeownership via tax savings. | Multiple homes also mean other costs (maintenance, insurance, property taxes which are capped by SALT). The tax break doesn’t cover those, and interest deductions on additional homes beyond two are disallowed – potentially limiting the incentive. |
In short, the mortgage interest deduction can make buying and owning a home more affordable, tax-wise, for those who benefit from itemizing. It’s often particularly valuable for higher-income taxpayers in expensive housing markets. However, it’s not a universal boon – many middle-class homeowners find the standard deduction now gives them a better result, and they effectively get no tax reward for their mortgage interest. It’s also an expensive tax expenditure from the government’s perspective, and its future (especially the $750k cap and SALT cap) is subject to political debates. As always, make financial decisions based on fundamentals (affordability, needs, investment potential of a home) rather than counting on tax breaks alone.
Frequently Asked Questions
Can I deduct mortgage interest on two houses?
Yes. Interest is deductible on your primary home and one additional home, as long as you itemize. Interest on a third personal home isn’t deductible (unless that property is treated as a rental).
If I have three homes, is interest on the third home deductible?
No. Interest on a third home used personally is nondeductible personal interest. If you rent out that third home, you can deduct its interest against the rental income instead.
Did the mortgage interest deduction change for 2024?
No. The mortgage interest deduction rules for 2024 are the same as in 2023 (two homes allowed, $750k debt cap, itemizing required). Only the standard deduction amounts increased slightly due to inflation.
Are property taxes on a second home also deductible?
Yes, but only up to a point. You can deduct property taxes for all homes as part of your state/local tax deduction, but the federal SALT deduction is capped at $10,000 per year.
Can I take the mortgage interest deduction without itemizing?
No. You must itemize to deduct mortgage interest. If you take the standard deduction, you can’t claim a separate mortgage interest write-off. It only pays to itemize if your itemized expenses exceed the standard deduction.
Is interest on a rental property’s mortgage deductible?
Yes. Mortgage interest on a rental or investment property is deductible on Schedule E (against rental income). It’s not claimed on Schedule A, and the two-home/$750k limits don’t apply to rental properties.
What is IRS Publication 936?
It’s the IRS’s official guide to the home mortgage interest deduction. Publication 936 details the rules, limitations, and examples, and includes worksheets for calculating your allowable interest.
Does refinancing affect my mortgage interest deduction?
It can. Refinancing alone doesn’t jeopardize your deduction. If you increase your mortgage or cash out for non-home purposes, interest on that extra portion isn’t deductible. Any new loan remains subject to the $750k cap.
Can unmarried co-owners each deduct mortgage interest?
Yes. Unmarried co-owners can each deduct the mortgage interest they pay on a shared home. Each can use the $750k debt limit separately, effectively doubling the amount allowed compared to a married couple.
Will the $750k mortgage limit change soon?
Maybe. Under current law, the $750k cap expires after 2025 and reverts to $1 million in 2026 (absent new legislation). Congress could extend or change this, so stay tuned for updates.