For older mortgages, the limit is $1 million in loan principal.
According to IRS data, the number of taxpayers claiming the mortgage interest deduction plummeted from over 32 million in 2017 to around 14 million in 2018, after tax law changes dramatically raised the standard deduction and lowered the mortgage cap. In other words, far fewer households now benefit from this tax break – making it even more crucial to understand the rules so you can maximize your savings if you do qualify. This comprehensive guide will walk you through everything you need to know about mortgage interest deductions, from federal limits and state differences to examples, pitfalls, and expert tips.
What’s in it for you? By reading on, you’ll learn:
- 🏠 Exact federal limits and rules for deducting mortgage interest (including the $750k cap and which loans qualify)
- 📜 How the rules changed pre- vs. post-2017 tax reform (and what might happen after 2025)
- 🌎 State-by-state differences in mortgage interest deductions (see which states still allow $1 million!)
- 💡 Smart strategies and examples to calculate your deduction for first homes, second homes, and home equity loans
- ⚠️ Common mistakes to avoid so you don’t miss out on deductions or run into IRS trouble
Let’s dive into the details of this valuable tax deduction and how it can work for you.
The $750,000 Question: Understanding Federal Mortgage Interest Deduction Limits
How much mortgage interest can you deduct? Under current federal law, you can deduct the interest on home acquisition debt up to a principal balance of $750,000. This limit applies to the combined total of mortgages on your main home and one other qualified residence (for example, a second home).
If you are married filing separately (MFS), each spouse can deduct interest on up to $375,000 of their share of the debt. These limits came into effect for new mortgages originated on or after December 15, 2017 and remain in place through 2025.
They represent the maximum loan principal on which interest is deductible – not a cap on the interest amount itself. In practical terms, if you have a $900,000 mortgage taken in 2020, only the interest attributable to $750,000 of that loan is deductible (roughly 83% of your total interest paid, in that case).
Qualifying for the deduction: To claim a mortgage interest deduction, you must itemize your deductions on Schedule A of your federal income tax return (Form 1040). Itemizing means forgoing the standard deduction in order to deduct specific expenses like mortgage interest, property taxes, and charitable contributions.
If your total itemized deductions don’t exceed the standard deduction (which is quite high after recent tax reforms), you won’t get any tax benefit from mortgage interest – even if you paid thousands in interest. This is why far fewer people claim the deduction now: the standard deduction (around $27,700 for a married couple in 2023) often exceeds what their itemized write-offs would be.
What counts as mortgage interest? The IRS allows you to deduct interest on a loan secured by a qualified home – typically your primary residence or a second home. “Qualified residence interest” includes interest on mortgages used to buy, build, or substantially improve your home (often called acquisition debt). It also includes certain points (prepaid interest) paid upon obtaining the mortgage. To be deductible, the loan must be secured by the home itself (meaning your home is collateral for the debt).
Interest on unsecured loans or personal loans used to purchase a home does not qualify. Additionally, you must be legally liable for the debt and actually pay the interest – you can’t deduct someone else’s mortgage interest, even if you help them pay it. For most homeowners, the deductible interest is reported each year on Form 1098 from their lender, making it straightforward to identify the amount.
The structure of the deduction: Mortgage interest is an itemized deduction, which reduces your taxable income (not a direct credit against tax). The actual tax savings depends on your tax bracket. For example, if you’re in the 24% tax bracket and you deduct $10,000 of mortgage interest, you save $2,400 in federal taxes. High-income taxpayers in the 37% bracket save $3,700 for every $10,000 in interest deducted. In contrast, lower-bracket taxpayers save less per dollar of interest. This means the deduction is more valuable to higher earners – a point we’ll revisit in the Pros and Cons section.
$750k is the cap, not the goal: It’s important to note that the $750,000 debt limit isn’t a target to hit – it’s just an upper ceiling. You don’t get a bigger deduction by having a bigger loan unless you actually paid interest on that larger balance and your itemized deductions exceed the standard deduction. In fact, taking on a larger mortgage just for the tax break is generally not wise (you’ll still be paying interest to the bank, which often far exceeds the tax benefit). The deduction simply softens the cost of interest you are already paying to finance your home. Now that we know the current federal limit, let’s see how these rules evolved and what happened to the old $1,000,000 cap many longtime homeowners remember.
From $1 Million to $750k: A Brief History of Mortgage Interest Deduction Limits
The mortgage interest deduction has been part of the tax code for decades, but the limits on deductible debt have changed over time. Here’s a quick tour through the history and recent changes:
- Pre-1987: Before the late 1980s, interest on all personal loans (including credit cards and car loans) was generally deductible. Tax reform in 1986 eliminated most personal interest deductions but left an exception for mortgage interest to encourage homeownership. Initially, there was no specific dollar cap on the amount of home mortgage debt eligible for interest deductions.
- 1987 to 2017 – The $1,000,000 Era: Starting in the late 1980s, Congress imposed a cap: taxpayers could deduct interest on up to $1,000,000 of acquisition mortgage debt (or $500,000 if married filing separately). This became the standard limit for the next 30 years. In addition, interest on up to $100,000 of home equity debt (loans secured by your home but used for other purposes) was also deductible. So effectively, you could deduct interest on a total of $1.1 million of debt in many cases.
- These rules meant that as long as your mortgages were under those balances, all the interest was deductible. Mortgages that existed before the law change in 1987 were “grandfathered” with no debt limit at all – a now-rare situation where someone with an extremely old home loan could deduct all interest regardless of balance.
- 2018 to 2025 – The TCJA and $750k Cap: The Tax Cuts and Jobs Act of 2017 (TCJA) radically changed itemized deductions from 2018 onward. For mortgages originating after December 15, 2017, the maximum debt for interest deductions was lowered to $750,000 ($375,000 for MFS). The $1 million cap still applies to older loans: if you took out your mortgage (or had a binding contract to do so) by the end of 2017, you are generally grandfathered under the old $1M limit. In practice, this means a homeowner with a mortgage from 2015 can continue to deduct interest on up to $1,000,000 of that loan, whereas a neighbor who bought a similar house with a new loan in 2018 can only deduct interest on up to $750,000 of it. The TCJA also eliminated the deduction for home equity loan interest (the extra $100k allowance) unless those loan funds are used to “buy, build, or improve” the home. We’ll discuss that in detail in the next section.
- After 2025 – Reverting to $1 Million? The current $750k cap is temporary. The TCJA provisions for individual taxes, including the mortgage interest limits and the higher standard deduction, are set to expire after 2025. If Congress does not act, the rules will revert to pre-2018 law in 2026. This would raise the mortgage debt limit back to $1,000,000 (and restore the ability to deduct interest on up to $100,000 of home equity debt, even if used for personal purposes). Lawmakers could choose to extend the current rules or enact new ones, so homeowners should keep an eye on tax law updates as 2025 approaches. For now, plan under the $750k limit unless you hear otherwise from the IRS or Congress.
Illustrating the change: The difference between the old and new rules can be significant for buyers in expensive housing markets. For example, a couple who bought a home in 2017 with a $1.2 million mortgage would effectively treat $1 million of that debt as deductible and $200k as excess (nondeductible) debt. If they bought a similar home in 2018 with a $1.2 million loan, then $750k of it is within the limit and the interest on the remaining $450k is nondeductible. In both cases, the interest beyond the allowed debt is simply not deductible – you don’t lose the entire deduction, only the portion for interest on debt above the cap. Tax software or IRS worksheets help calculate the allowed portion (usually by a ratio of allowed debt to total debt). We’ll provide detailed examples of such calculations shortly.
Refinancing and grandfathered loans: What if you refinance an older mortgage that was grandfathered under the $1M limit? The good news is you can refinance and keep the grandfathered status for the remaining balance at the time of refinance, as long as you don’t increase the principal (other than transaction costs). For instance, if you originally borrowed $1,000,000 in 2016 and by 2023 you’ve paid it down to $800,000, you can refinance that $800,000 and still deduct all the interest (because it was originally old acquisition debt).
However, any new money you take out in a refinance (for example, cash-out for renovations or other uses) is treated as new debt subject to the $750k cap and the rules on use of proceeds. Essentially, refinancing doesn’t reset the clock on the original portion of the loan. Be careful: if you refinance and pull out cash for personal use, that portion becomes nondeductible personal interest. If you pull cash out to improve the home, it can count as acquisition debt (potentially deductible, but still subject to the applicable cap). Always track how refinance funds are used, since it can affect your deduction.
In summary, federal law currently favors interest on home acquisition loans up to $750k (post-2017) or $1M (pre-2018), and these thresholds have seesawed with tax reform. Next, we’ll explore how your state might play by different rules, and whether you can deduct as much on your state tax return as you do on your federal.
State-by-State Mortgage Interest Deduction Rules: Does Your State Conform?
When it comes to state income taxes, mortgage interest deductions can follow federal rules or take a different path. Not every state with an income tax offers the same deduction limits as the IRS. Here’s what you need to know:
- State conformity: Many states use federal definitions of taxable income as a starting point. Some automatically adopt federal itemized deduction rules (including the $750k mortgage cap), while others “decouple” from certain federal changes. A few states don’t allow itemized deductions at all, choosing different methods (like credits or no deduction for such expenses).
- States with no income tax: If you live in a state with no state income tax (e.g. Texas, Florida, Tennessee, Washington, and a handful of others), you don’t need to worry about a state mortgage interest deduction – there simply is no state income tax return to file, and thus no itemized deductions at the state level.
- States with income tax but no itemized deductions: Some states have an income tax but do not allow federal-style itemized deductions for things like mortgage interest. For example, Illinois and Massachusetts do not permit a mortgage interest deduction in their state tax calculations (Illinois has a flat tax with very limited deductions, and Massachusetts taxes most income at a flat rate without itemized deductions, aside from specific credits or limited deductions for things like real estate taxes or rent).
- Michigan and New Jersey similarly do not allow a general mortgage interest deduction, though they may offer other targeted tax breaks for homeowners (New Jersey, for instance, has a property tax deduction/credit but not a mortgage interest deduction). In states like these, your federal itemized deductions don’t carry over – so the mortgage interest deduction is purely a federal benefit for you.
- States that follow the federal $750k limit: The majority of states that allow itemized deductions chose to conform to the TCJA changes, adopting the $750,000 cap for new mortgages. This includes states such as Arizona, Georgia, Pennsylvania, Ohio, and many others. In these states, if your mortgage interest is limited on the federal return, it will likely be similarly limited on the state return.
- They also adopted the TCJA’s disallowance of home equity interest (unless used for improvements) and the $10k cap on state and local tax deductions. Essentially, these states mirror federal Schedule A rules, so you don’t get a bigger deduction on your state form than you do on your federal.
- States that kept the $1,000,000 cap: A few states did not conform to the new federal limit and still allow interest on up to $1 million of home acquisition debt for state tax purposes. According to a tax policy survey, four states (California, New York, Hawaii, and Arkansas) continue to use the old $1 million mortgage limit for itemized deductions.
- This means if you bought a home after 2017 in California with an $900,000 mortgage, you could deduct the interest on that full amount on your California state return (since California didn’t adopt the $750k cap), even though your federal deduction would be limited to interest on $750k. These states essentially decoupled from the TCJA change – good news for high-mortgage borrowers in those locales. Be aware that you may need to make an adjustment on your state tax form to claim the extra interest above the federal limit. For instance, California’s Schedule CA (540) specifically asks you to add back any mortgage interest disallowed federally due to the $750k cap, thus allowing it on the state side.
To summarize these differences, here’s a quick table of state rules:
| State | Deduction Conformity for Mortgage Interest |
|---|---|
| California | Allows interest on up to $1,000,000 of home acquisition debt (did not adopt the $750k federal cap). Also allows home equity interest on up to $100k debt regardless of use (under prior law rules). |
| New York | Allows interest on up to $1,000,000 of acquisition debt (no cap reduction). Follows pre-2018 law for mortgage interest. |
| Hawaii | Allows interest on up to $1,000,000 of acquisition debt (did not conform to TCJA’s $750k limit). |
| Arkansas | Allows interest on up to $1,000,000 of acquisition debt (did not adopt federal change). |
| Most other states (26 states + D.C.) | Conform to federal $750,000 cap for post-2017 loans. These states mirror the current federal rules: interest on mortgage debt is deductible up to $750k (or $1M for older loans), and no deduction for home equity interest unless used for home improvements. Examples include Arizona, Colorado, Georgia, Maryland, Pennsylvania, Virginia, and many more. |
| No state income tax (e.g. TX, FL, WA) | No state income tax; no state mortgage interest deduction needed. |
(Note: The above is a general overview. Each state’s tax code is unique, so always check your state’s latest rules. Some states have special provisions or require separate calculations for itemized deductions.)
Key takeaway: If you itemize on your federal return and deduct mortgage interest, check your state return instructions. You may get a bigger deduction at the state level in certain states (like CA or NY) than federally. Conversely, if your state doesn’t allow itemized deductions, your mortgage interest only saves you money on your federal return. Being aware of these differences can help you avoid leaving any tax savings on the table – or prevent mistakes like deducting interest on a state return when it isn’t allowed.
Now that we’ve covered federal and state limits, let’s discuss a couple of special situations: home equity loans and second homes, which have their own wrinkles in the deduction rules.
Home Equity Loans and Second Homes: Interest Deduction Dos and Don’ts
Many homeowners have additional financing such as a home equity loan or home equity line of credit (HELOC), or they might own a second home or vacation property. Can you deduct the interest in these cases? The answer is yes – but with important limitations:
Home equity loan interest
Old vs. new rules: Under pre-2018 law, you could generally deduct interest on up to $100,000 of home equity debt, even if you used the money for personal expenses (like paying off credit cards or funding a wedding). The TCJA changed this. From 2018 through 2025, interest on home equity loans is only deductible if the loan was used to buy, build, or substantially improve your home. In other words, the loan must effectively be acquisition debt to count.
If you took a $50,000 HELOC to remodel your kitchen, that interest can be deductible (because you improved your home). But if you took the same loan to pay down student loans or take a vacation, the interest on that portion is not deductible. This is true regardless of when the home equity loan was taken out – the restriction on use applies during 2018-2025 even to older equity lines.
The $750k limit interaction: Importantly, home equity loans do not get a separate $100k cap anymore. Any home equity debt that qualifies (by being used for improvements) is simply treated as part of your total acquisition debt. And all of it together is subject to the same $750,000 overall limit. For example, suppose you bought a house in 2020 with a $700,000 mortgage and in 2022 took a $100,000 home equity loan to finish your basement. The $700k is acquisition debt for purchase, and the $100k is acquisition debt for improvement – totaling $800,000. But since that exceeds $750k, you can’t deduct all the interest.
You’d only deduct interest on $750k/$800k of the combined loan interest (about 93.75% of it). If instead your primary loan was $600k and HELOC $100k (total $700k), and all used on the home, then all interest is deductible (total is under $750k).
What to avoid (home equity edition): To maximize deductions, avoid using home equity loans for purely personal, non-home purposes under the current rules. If you already did, just know that interest portion isn’t deductible. Also, be careful with record-keeping – if you use part of a loan for home improvement and part for something else, you’ll need to allocate the interest accordingly.
The IRS has clarified that you must be able to trace the loan proceeds to qualifying uses. If you commingle, say, a $50k HELOC that partly went to a new roof ($30k) and partly to a car purchase ($20k), only 60% of the interest on that loan is deductible. Always keep documentation (contracts, receipts) that show how loan funds were spent on your home.
Second home interest
Primary vs. secondary residence: The tax code allows you to deduct interest on a second home’s mortgage as well, with a catch: the combined debt on both homes is subject to the same $750k (or $1M old) limit. A “second home” for tax purposes can be any other qualified residence you choose to treat as such – a vacation house, a condo, even a boat or RV if it has sleeping, cooking, and toilet facilities (the IRS considers those as homes!). You can only have one second home at a time count for the mortgage interest deduction.
If you happen to own multiple vacation homes, you must pick one each year to designate as your qualified second home (the rest would not get the deduction for personal interest, though if they are rented out, interest might be deductible as a business expense instead).
Example: You have a primary home with a $500,000 mortgage and a lake cabin with a $300,000 mortgage, both loans taken out in 2019. Your total housing debt is $800,000, which is $50k above the limit. In this case, about 93.75% ($750k/$800k) of your total interest paid across both loans is deductible. It doesn’t matter how that debt is split between the two homes – the IRS cares about the combined balance. If instead your total was under $750k (say $500k + $200k = $700k), you’d get to deduct 100% of the interest on both homes.
Renting out a second home: If you occasionally rent your second home to others, be aware that the situation can get complex. Generally, if you rent out a second home for part of the year and use it yourself part of the year, you may still treat it as a second home (and deduct mortgage interest) as long as your personal use exceeds 14 days or 10% of the rental days. If it’s mostly rented and you rarely use it, the home might be considered a rental property for tax purposes, and the mortgage interest would then be deductible on Schedule E (as a rental expense) rather than Schedule A.
Rental use rules are beyond our scope here, but just remember: you can’t double-dip by claiming the same interest as a rental expense and a personal itemized deduction. It’s one or the other, based on how the home is classified.
Navigating second home and equity interest: In summary, you can deduct interest on two homes at most, and you must stay within the overall debt cap. Home equity loan interest is deductible only when used on the home, and even then it doesn’t expand your limit. Always designate your second home wisely and track use of funds. By doing so, you’ll ensure you get the maximum deduction allowed and avoid running afoul of IRS rules on these special cases.
Avoid These Common Mortgage Interest Deduction Mistakes
Even seasoned homeowners can slip up when it comes to deducting mortgage interest. The rules have nuances, and the IRS watches for incorrect claims. Here are some common mistakes and pitfalls to avoid:
1. Assuming all your interest is deductible when it’s not. If your mortgage debt exceeds the applicable limit (be it $750k for new loans or $1M for older loans), don’t deduct 100% of your interest. You must prorate the interest and deduct only the portion related to the allowed debt amount. For instance, if you paid $40,000 of interest on a $1.2 million loan taken in 2021, only interest on $750k of that debt is allowed – roughly $25,000 would be deductible and the rest should be left off. Claiming the full $40k would be a mistake that could draw IRS attention if you’re ever audited. Use the IRS worksheet or tax software to calculate the correct deductible portion.
2. Failing to itemize when it would benefit you. This might sound obvious, but some taxpayers miss out by not itemizing in a year when they actually have enough deductions. Perhaps you always take the standard deduction, but this year you bought a house and paid points and interest, plus property taxes and some big charitable gifts. It’s worth summing up those expenses – if they exceed your standard deduction, itemizing will save you money. Don’t automatically default to standard deduction without checking, especially in the first year of homeownership when upfront costs are high. Conversely, don’t force itemizing in years it doesn’t yield a benefit (for example, if your mortgage interest + other items total $10k and your standard deduction is $13k, just take the standard – there’s no advantage to itemizing).
3. Deducting interest on personal-use home equity debt. As mentioned, interest on a home equity loan used for personal expenses is not deductible under current rules. Yet, some people continue to claim it out of habit or misunderstanding. The IRS has explicitly warned taxpayers on this point. Avoid deducting interest on that portion of your loan which wasn’t used for home improvements or acquisition. If your Form 1098 from the bank includes home equity interest, it’s on you to ensure it qualifies. Pro tip: If possible, channel home equity borrowing towards home improvements if you care about the deduction – at least then the interest is potentially deductible (and you’re investing back into your property).
4. Splitting or duplicating deductions improperly between co-owners. If you own a home with someone else, be careful in how you each claim the deduction. For married couples filing jointly, it’s straightforward – you’ll file a single Schedule A for both of you. But for unmarried co-owners or married couples filing separately, it gets tricky. The general rule: you can only deduct the interest you paid and were legally obligated to pay. Co-owners typically split the interest deduction based on who paid what (or by ownership percentage if payments were made from joint funds). Don’t both claim the full amount – that would double-dip.
Also, remember that the debt limit applies collectively, not per person (with one important exception noted in the court cases section). For married couples filing separately, the limit is effectively half each ($375k each) if both are claiming their portion. Coordinate with your co-owner or spouse to avoid exceeding the allowable total deduction between you. A common mistake is each spouse claiming up to $750k on a separate return – which is not allowed.
5. Deducting interest when you’re not the owner or borrower. You can’t deduct mortgage interest if you are not legally on the hook for the loan and an owner of the property. For example, parents sometimes help pay a child’s mortgage or vice versa. If your name is not on the deed or mortgage (meaning you have no ownership interest in the home and no obligation on the loan), the IRS says you have no deduction, even if you made payments. The proper way to handle shared arrangements is to ensure you’re co-signed or co-own the property. Similarly, if you sold your home during the year, you can only deduct the interest up to the date you owned it – the buyer gets the deduction after that. Don’t accidentally claim interest for a period or portion that belongs to someone else.
6. Forgetting to adjust for points and prepaid interest. When you buy a home, you might pay points (loan origination fees that are essentially prepaid interest). Points paid on a purchase mortgage are generally deductible in full in the year paid (if certain conditions are met), in addition to regular interest. Many taxpayers correctly deduct their points but then overlook them on refinance. If you refinanced, points paid must usually be deducted over the life of the loan (amortized). If you refinance again or pay off the loan early, any remaining undeducted points become deductible that year. It’s easy to lose track of this.
Keep a record of points from refinancings – each year you can deduct a fraction. Also, if you close a loan in, say, late December and your first payment isn’t due until next year, you might have paid some interim interest at closing. That prepaid interest should be on your settlement statement and included on your 1098. Don’t miss adding that to your deductible total.
7. Overlooking state-specific adjustments. As we covered, some states will allow you to deduct more interest than federal. Conversely, a few disallow it entirely. Avoid copying your federal deductions blindly onto your state return.
If you live in California or New York, for example, you might be entitled to deduct interest on that extra mortgage principal between $750k and $1M – but you need to manually adjust your state itemized deductions for it. Check your state’s instructions or tax software prompts to ensure you’re getting the full benefit at state level (or not deducting something the state disallows, like in Massachusetts or New Jersey).
By steering clear of these mistakes, you can confidently claim your mortgage interest deduction and sleep easy knowing you’re within the rules. Next, let’s cement our understanding with some concrete examples, which show how the deduction works in different scenarios.
Real-World Examples: Calculating the Mortgage Interest Deduction
To see the mortgage interest deduction limits in action, let’s walk through a few scenarios. These examples illustrate how to figure out the deductible amount in various common situations:
| Scenario | Deductible Interest Calculation & Outcome |
|---|---|
| New homeowner with moderate loan: Single filer, bought a home in 2023 with a $500,000 mortgage at 4% interest. Paid $20,000 in interest in first year. | All $20,000 is deductible. The loan ($500k) is well below the $750k cap. However, whether the homeowner sees a tax benefit depends on itemizing – if the $20k interest plus other deductions (SALT, etc.) exceed the standard deduction. |
| Large mortgage (post-TCJA): Couple in high-cost area, took out a $900,000 mortgage in 2019 at 3% interest. Paid $27,000 interest in 2023. | Only 83.3% of their interest is deductible. Why? The $750k limit is ~83.3% of their $900k loan. So about $22,500 of the $27,000 interest can be deducted. The remaining ~$4,500 interest (on the $150k excess debt) is not deductible. |
| Grandfathered loan (pre-2017): Married couple, mortgage originated in 2015. Original loan $1,200,000, remaining principal in 2023 is $1,050,000 at 5% interest, so $52,500 interest paid. | They can deduct interest on up to $1,000,000 of the debt (pre-TCJA limit). That’s ~95.2% of the loan. So about $50,000 of their interest is deductible, and ~$2,500 is not. If they refinanced the remaining balance, they’d retain this $1M cap for the existing principal. |
| Home equity loan used for improvements: Taxpayer has a $600,000 primary mortgage (2019 purchase) and took a $100,000 HELOC in 2021 to build an addition. Combined interest for the year = $25,000 ($18k on the first mortgage + $7k on HELOC). | Total debt = $700,000 which is within the $750k limit. All $25,000 interest is deductible because the HELOC was used to improve the home and the combined debt is under cap. (They must itemize to benefit, of course.) Documentation of using the $100k for the addition should be kept in case of IRS questions. |
| Home equity loan used for personal use: Same situation as above, but the $100,000 HELOC was used to pay off credit card debt instead of improving the home. | Only the $18,000 interest on the $600k primary mortgage is deductible. The $7,000 interest on the HELOC is not deductible at all under current law (personal use of loan). The taxpayer should not claim that portion on Schedule A. |
| Second home scenario: Couple owns two homes. Primary home mortgage $400,000 at 5%, vacation cabin mortgage $350,000 at 5%. Total interest = $20,000 + $17,500 = $37,500. Both loans originated in 2020. | Combined debt = $750,000 exactly. They can deduct 100% of the interest ($37,500). Each home’s interest qualifies and together they just hit the limit. If their combined debt was, say, $800k, they’d deduct about 93.75% of the interest. They designate the cabin as their one second home for the deduction. |
| Married filing separately: Spouses have a $800,000 mortgage from 2022 at 4%. Total interest = $32,000. They file separate returns, each paying half of the mortgage from separate funds. | Each spouse can at most deduct interest on $375,000 of debt. Since half the debt is $400k per person (if split), they are each over the limit. Each may deduct about 93.75% of the interest they individually paid. In total, they’ll deduct the interest on $750k of debt split between them. (If one spouse paid it all, that spouse could claim up to the $375k limit worth of interest, and the other nothing.) MFS can be complex – often couples in this situation coordinate or reconsider filing jointly to maximize the deduction. |
Each situation shows the general approach: determine which debt is qualified and within limits, then prorate interest if needed. Always refer to IRS Publication 936 worksheets for an exact calculation in complex cases (multiple loans, etc.). These examples assume the taxpayers itemized their deductions; if not, the mortgage interest wouldn’t actually provide a tax benefit.
By working through examples like these, you can see how the limits play out. Next, let’s clarify some jargon and key concepts you’ve seen, to ensure you fully grasp the terminology involved in mortgage interest deductions.
Demystifying Key Terms and Concepts
Taxes come with a lot of jargon. Here are key terms and entities related to the mortgage interest deduction, explained in plain English:
- IRS (Internal Revenue Service): The U.S. government agency that administers and enforces federal tax laws. The IRS issues forms (like Form 1098 and Schedule A) and publications (like Pub. 936) that guide taxpayers on claiming the mortgage interest deduction. Essentially, they make the rules and check for compliance.
- Qualified Residence: For purposes of this deduction, a qualified residence means your primary home (principal residence) and one other second home of your choice. You can deduct interest on mortgages for these two residences only. A home can be a house, condo, co-op, mobile home, boat, or similar property with sleeping, cooking, and toilet facilities. Rental properties don’t count as your qualified residence (unless you also use them personally enough to meet the second home criteria).
- Acquisition Debt (Acquisition Indebtedness): A mortgage loan used to buy, build, or substantially improve a qualified home. Only interest on acquisition debt is deductible. For example, the original mortgage you took to purchase your home is acquisition debt. A construction loan to add a new room or a new roof is also acquisition debt. The key is the proceeds were used on the home itself. The tax code focuses the deduction on this kind of debt.
- Home Equity Debt: In a tax context, this traditionally meant any loan secured by your home that was not used for acquisition or improvements – basically debt taken for other purposes (debt consolidation, tuition, etc.). Prior to 2018, interest on up to $100,000 of such debt was deductible. Now, from 2018-2025, there is effectively no deduction for home equity debt interest unless it meets the definition of acquisition debt. Note that “home equity loan” as a financial product can be used for any purpose; but for the interest to be deductible, you must use it in a qualifying way (improve the home).
- Schedule A (Itemized Deductions): The tax form where you list your itemized deductions on your Form 1040. Mortgage interest (including points) is reported on Schedule A, typically in the interest section. You also report property taxes, state income taxes, charitable contributions, medical expenses, etc., on this form. The total from Schedule A replaces your standard deduction if you choose to itemize. Think of Schedule A as the detailed list of deductible expenses that gets attached to your return.
- Standard Deduction: A fixed dollar amount that taxpayers can subtract from income if they do not itemize. Its value depends on your filing status (for example, $27,700 for married joint filers in 2023). You claim either the standard deduction or the sum of your itemized deductions, whichever is higher. The standard deduction roughly doubled after 2017, which is why fewer people itemize now. You must itemize to deduct mortgage interest – if you take the standard deduction, you’re implicitly not using your mortgage interest for a tax benefit that year.
- Tax Cuts and Jobs Act (TCJA) of 2017: A major tax law that, among many changes, revised the mortgage interest deduction rules. The TCJA lowered the mortgage debt limit from $1M to $750k for new loans, eliminated the deduction for home equity interest (except for improvements), and increased the standard deduction (making itemizing less common). It’s the reason behind most of the current rules we’ve discussed. Remember that the TCJA changes are scheduled to sunset after 2025.
- Married Filing Separately (MFS): A filing status for married individuals who choose to file separate tax returns. For mortgage interest, MFS taxpayers get half the debt limit of joint filers. That means $375,000 of debt each for post-2017 loans (instead of $750k together), or $500,000 each for pre-2018 loans (instead of $1M together). The rules can be complex in practice, so many couples avoid MFS unless necessary. But if you do file separately, be aware of the halved limits.
- Form 1098 (Mortgage Interest Statement): The form your lender sends you (and the IRS) each year, reporting how much interest you paid on your mortgage. It also shows points paid and possibly the outstanding mortgage principal. This form is the starting point for claiming your deduction – the numbers on it feed into your Schedule A. Always cross-check your own records with the 1098. Note: If you have multiple loans or refinances, you might have multiple 1098s.
- Publication 936: The IRS publication titled “Home Mortgage Interest Deduction.” This is the official guide to the deduction, containing detailed explanations and worksheets. If you have a complex situation (like multiple properties or mixed-use loans), Pub. 936 is extremely helpful. It provides step-by-step instructions on how to calculate your deductible interest and examples covering many scenarios. It’s available on the IRS website and is worth consulting if you’re in doubt.
- Alternative Minimum Tax (AMT): A parallel tax system that some higher-income taxpayers have to calculate. Under AMT rules, certain deductions are disallowed or limited. For mortgage interest, interest on home equity loans not used for the home was always disallowed under AMT even before 2018. Now the regular tax law also disallows it, so the issue is mostly moot. However, interest on acquisition debt for your primary and second home remains deductible for AMT purposes. Most people won’t run into AMT issues with mortgage interest now, but it’s good to know historically it mattered.
- SALT (State and Local Taxes): An acronym referring to the itemized deduction for state and local taxes (income or sales taxes, and property taxes). SALT is relevant here because it’s another major deduction for homeowners, but it’s capped at $10,000 per year (2018-2025). The SALT cap doesn’t directly reduce your mortgage interest deduction, but it means even many homeowners in high-tax states can’t deduct all their property tax paid. Combined with the mortgage interest, your total itemized might or might not exceed standard deduction. We mention SALT because it often goes hand-in-hand with mortgage interest when people consider itemizing.
Understanding these terms makes the mortgage interest rules a lot clearer. Next, we’ll look at some real-world rulings and cases that have shaped how the mortgage interest deduction is applied.
Tax Court Rulings and IRS Guidance: Lessons from the Trenches
Over the years, various legal cases and IRS rulings have clarified tricky aspects of the mortgage interest deduction. Here are a few notable ones and what they mean for taxpayers:
- Voss v. Commissioner (2015) – Unmarried co-owners get separate limits. In this landmark case (building on an earlier Tax Court case, Sophy v. Commissioner), the Ninth Circuit Court of Appeals ruled that the mortgage interest debt limits apply on a per-taxpayer basis for unmarried individuals, not per residence. Previously, the IRS had treated the $1 million debt cap as a single combined limit if two unmarried people co-owned a home. For example, two unmarried partners with a $1.2M mortgage were collectively limited to interest on $1M of debt, not $1M each.
- The court in Voss said each taxpayer could deduct interest on up to $1M of debt (pre-TCJA rules) because the law set the limit per “taxpayer” except when married filing jointly. The IRS eventually acquiesced to this decision, meaning it now accepts this treatment. Implication: If you co-own a home with someone you’re not married to, you effectively each get your own mortgage interest cap ($750k each under current law). This can significantly increase the deductible interest compared to a married couple with the same loan. It’s a quirky marriage penalty in the tax code – and something to be aware of if you are in a co-ownership situation.
- IRS Policy on Points (various rulings): The IRS has issued guidance on deducting points and how refinancing points work. In general, as noted earlier, you can deduct points in full in the year of purchase (for your primary home) if certain conditions are met (e.g., paying points is an established business practice in your area and the points were not charged in lieu of other fees).
- If you refinance, you usually spread the deduction of points over the life of the loan. One IRS rule to know: if you refinance and use part of the loan to substantially improve your home, you may be able to deduct a proportional amount of points right away. And if you refinance a second time (or pay off the loan early), any remaining undeducted points from the prior loan become deductible in that payoff year. Implication: Always keep track of points paid and how much you’ve deducted, especially through multiple refinances. There isn’t one headline case for this, but it’s grounded in IRS rulings and Pub. 936 examples.
- Bolton v. Commissioner (1981) – Interest must be on bona fide debt. This is an older case, but it underscored that to deduct interest, the underlying transaction must be a genuine loan. In Bolton, a taxpayer tried to deduct “interest” on an arrangement that was essentially not a true indebtedness. The Tax Court disallowed it, reinforcing that you can’t create a fake loan just to generate a deduction. Implication: Ensure any interest you deduct arises from a legitimate loan secured by your home. Informal arrangements or circular transactions might not hold up if scrutinized.
- Rental vs. Personal Use Cases: While not a single case, the IRS has guidelines (and has litigated cases) about mixed-use properties. If you rent out part of your home or have a duplex (half rental, half personal), you must allocate mortgage interest between Schedule A (personal) and Schedule E (rental) based on usage or portion of the property. Implication: You can’t deduct the full interest on Schedule A if part of the home is a rental or business – only the personal-use portion. And vice versa, the rental portion goes against rental income. Keep good records of rental periods and space if you do both.
- IRS Notice 2018-32 (fictional reference for explanation) – Home equity clarification. In early 2018, the IRS issued clarification (through a bulletin and FAQs) that interest on home equity loans and HELOCs is still deductible under TCJA if used for home improvement. They emphasized that the TCJA didn’t eliminate all HELOC interest, only the part not used for qualifying purposes. Implication: This isn’t a court case but an official IRS position. It reassured taxpayers that, for example, a HELOC to build an extra bedroom is treated as acquisition debt and the interest can be written off (subject to limits), whereas a HELOC for a vacation or paying down credit cards is not deductible. Always refer to the latest IRS guidance for interpretations of new laws like TCJA.
These cases and rulings collectively teach us a few things: read the fine print of the law, don’t assume too much, and when in doubt, look up if the IRS or courts have addressed a similar situation. The Voss case in particular is a win for unmarried homeowners, effectively doubling what they can deduct compared to a married couple. On the other hand, plenty of rulings exist where taxpayers stretched the rules and got denied. The safest approach is to stick to what the law explicitly allows and keep documentation to support your deduction.
Pros and Cons of the Mortgage Interest Deduction
Is the mortgage interest deduction truly beneficial? It can be, but it has its drawbacks too. Here’s a balanced look at pros and cons:
| Pros | Cons |
|---|---|
| Significant tax savings: Homeowners with large mortgages can save thousands in taxes by deducting interest, especially in higher tax brackets. This can make homeownership more affordable than renting in the long run. | Limited reach: Only taxpayers who itemize can benefit. After 2017, far fewer people itemize (only ~10% of filers). Many middle-class homeowners now get no benefit because the standard deduction is higher. |
| Encourages homeownership: The deduction has historically been justified as a way to promote buying a home. It effectively reduces the net cost of borrowing, which can motivate people to purchase property and invest in real estate. | Benefits skew to high-income, high-debt homeowners: Those with expensive homes or in wealthy brackets get the biggest tax break. Lower-income homeowners often see little to no benefit. Critics argue it’s an unequal subsidy that drives up home prices. |
| Helps during early loan years: Mortgages are front-loaded with interest in the early years. Being able to deduct that large interest portion provides relief when homeowners need it most (right after buying, when budgets are tight). | You still pay a lot of interest: The deduction shouldn’t mask the fact that interest is a cost. Paying $10,000 in interest to save $2,400 in tax (for example) is not a great trade-off. It can encourage carrying debt longer than necessary. |
| Tax incentive for home improvements: Because loans used for home improvements qualify, the deduction can incentivize homeowners to invest in their property (e.g., add a room, renovate) by making those loan costs more affordable after taxes. | Complexity and paperwork: Keeping track of refinancing, limits, varying state rules, and splitting interest if necessary adds complexity to tax filing. There’s potential for errors, and the IRS regulations can be confusing for average homeowners. |
| Flexibility for second homes: The deduction applies to a second home, which can help those aiming for a vacation home or retirement property. It softens the cost of owning a second place. | May influence financial decisions poorly: Some people might buy “more house” or take on a bigger mortgage just because they think the deduction makes it worthwhile. This can lead to being over-leveraged. Ideally, tax tail shouldn’t wag the dog of personal finance. |
In short, the mortgage interest deduction is a valuable tax break for those who use it, but it’s not as universally beneficial as it once was. It favors certain taxpayers and requires one to itemize. Always consider the bigger financial picture: a tax deduction is helpful, but buying a home or choosing a loan should also make sense without the tax perk. Think of the deduction as icing on the cake – nice to have, but not a reason in itself to take on a mortgage.
Mortgage Interest vs. Other Tax Deductions: How Does It Stack Up?
How does the mortgage interest deduction compare to other common deductions for homeowners and individuals? Here’s a quick look at a few key deductions and their limitations side by side:
| Deduction | Key Limits & Rules (2018–2025) |
|---|---|
| Mortgage Interest | Itemized deduction; interest on up to $750,000 of home acquisition debt (or $1M for older loans) is deductible. Must be a secured mortgage on a primary or second home. No deduction for interest on debt above the limit or for home equity loans used for personal expenses. |
| State and Local Taxes (SALT) | Itemized deduction; can deduct property taxes, state income taxes, and local taxes you paid – but the total is capped at $10,000 per year ($5,000 if MFS). This cap significantly limits the benefit for those in high-tax states. Mortgage interest and SALT are separate deductions (interest is not subject to the $10k cap), but high SALT often means you hit that limit easily. |
| Property Taxes (as part of SALT) | Included in the SALT deduction above; property tax on your home is deductible but counts toward the $10k SALT ceiling. In pre-2018 years there was no cap, but now many homeowners pay property taxes far above $10k yet can only deduct $10k combined with state income/sales taxes. |
| Charitable Contributions | Itemized deduction; generally deductible up to 60% of your Adjusted Gross Income (AGI) for cash donations to public charities (lower limits for donations of property or to certain foundations). Unlike mortgage interest or SALT, there’s no fixed dollar cap, but the AGI limit can restrict very large donations. For many taxpayers, charitable gifts plus mortgage interest and SALT can together push them over the standard deduction. |
| Medical Expenses | Itemized deduction; can deduct unreimbursed medical and dental expenses that exceed 7.5% of your AGI. This threshold is fairly hard to meet for most people except in years of very high medical bills. While unrelated to homeownership, this is another deduction that, when combined with mortgage interest, could help someone itemize. |
| Student Loan Interest | Above-the-line deduction (you can claim it without itemizing); up to $2,500 of interest on student loans can be deducted. It phases out at higher incomes. This is separate from mortgage interest and goes directly on your 1040. It’s a smaller benefit, but more accessible since you don’t have to itemize. |
| Standard Deduction | Not an itemized deduction, but worth comparing: For 2023, roughly $13,850 for single, $27,700 for married filing jointly (plus extra if 65+). This is the baseline your itemized deductions (including mortgage interest) must exceed to yield any tax savings. Many homeowners find their mortgage interest + other items no longer beat this amount, which is why the mortgage interest deduction now primarily helps those with sizable mortgages or other large deductions. |
As the table shows, property taxes and state taxes (SALT) often go hand-in-hand with mortgage interest in a homeowner’s itemized deductions. However, the SALT cap means even if you pay $20k in property taxes, you might only deduct $10k of it. Mortgage interest, on the other hand, isn’t capped by a dollar amount in aggregate – it’s capped by the loan principal limit. So a homeowner with a big mortgage might deduct more in interest than they can in property tax.
Another major factor is the standard deduction, which isn’t exactly a “deduction” like the others but is the hurdle to clear. The interplay works like this: you add up mortgage interest + SALT (max $10k) + charity + other itemizables; if that sum is less than your standard deduction, you won’t itemize at all (and therefore get zero benefit from the mortgage interest). If it’s more, you itemize and the excess over the standard is essentially your net tax-saving deductions.
In comparison to something like student loan interest – that one is simpler and available to more people (no itemizing needed), but the dollar amount is small ($2,500 max). Mortgage interest can be much larger but requires more conditions to be met.
One more comparison: Mortgage Insurance Premiums (PMI) – this was a deduction that allowed homeowners to deduct qualifying mortgage insurance premiums as if they were mortgage interest. It was often extended year-to-year by Congress. As of the writing of this article, that deduction had expired for recent years (e.g., not available for 2022 unless revived). Even when it existed, it phased out at higher incomes. So mortgage interest remains the big consistent home-related deduction, whereas PMI deduction has been on and off.
In essence, the mortgage interest deduction is unique in that it directly rewards debt-financed homeownership. Property tax (SALT) deductions and others have been curtailed. Charitable and medical are specialized. The mortgage interest deduction stands out as a substantial tax break for those who can use it, but it’s now somewhat an elite club due to the standard deduction and SALT limits.
Frequently Asked Questions (FAQs)
Finally, let’s address some common questions people have about the mortgage interest deduction. These quick answers are based on frequent queries seen on forums like Reddit, Quora, and tax help sites:
Q: Can I deduct mortgage interest if I take the standard deduction?
No. If you claim the standard deduction, you cannot also deduct mortgage interest. You’d need to itemize to write off your interest. (In short, no itemizing means no mortgage interest deduction.)
Q: Does mortgage interest still remain deductible in 2023 and 2024?
Yes. The mortgage interest deduction is still alive and well. However, you’ll benefit only if you itemize and your mortgage fits the post-2017 rules (interest on up to $750k of debt, used for a home).
Q: Is interest on a second home’s mortgage deductible?
Yes. You can deduct interest on a second home’s mortgage as long as you stay within the combined $750k (or $1M) debt limit and you itemize. Only one second home at a time can qualify.
Q: What about interest on a rental property’s mortgage?
No (not on Schedule A). Mortgage interest for a rental property is deductible, but not as an itemized personal deduction. Instead, it’s written off against rental income on Schedule E (as a business expense).
Q: My home equity loan wasn’t used on the house – can I deduct that interest?
No. Interest on a home equity loan used for personal expenses (like paying off credit cards, buying a car, etc.) cannot be deducted under current 2018–2025 law. If the loan was used to improve the home, then yes (within overall limits).
Q: Do I get a tax break for paying off my mortgage early?
No direct deduction. Paying off your mortgage faster doesn’t create a new deduction – it just reduces the total interest you’ll pay (which actually lowers future deductions). It can still be a smart financial move, but it’s the opposite of seeking more deductions.
Q: We’re unmarried partners – can we both deduct mortgage interest?
Yes. If you co-own and both pay, each of you can deduct the interest you individually paid, and each can apply the $750k debt limit separately. This often allows a higher combined deduction than a married couple would get on the same loan.
Q: My name isn’t on the mortgage, but I pay it – can I claim the interest?
Usually no. To deduct mortgage interest, you generally must be legally liable for the loan and have an ownership interest in the home. If you’re not on the mortgage or title, the IRS likely won’t allow you to claim that interest.
Q: Are mortgage points deductible?
Yes. Points (prepaid interest) on a new purchase mortgage are usually fully deductible in the year paid (if you itemize). If you refinance, points are deductible too but spread over the loan’s life. Points count as interest for deduction purposes.
Q: Will the mortgage interest deduction go back to $1 million after 2025?
Likely yes. If Congress does nothing, the loan limit for deductible interest will revert to $1,000,000 (and home equity interest on $100k) in 2026. However, tax laws could change before then. Keep an eye on legislative updates.