Mortgage Tax Deduction Requirements
You already know that paying interest on your home loan is fully deductible. This mortgage tax deduction, or home mortgage interest deduction, is a very useful tax break by the IRS for homeowners.
To be eligible by the IRS to use the home mortgage tax deduction you must meet the following requirements:
- 1. You must file form 1040 and itemize deductions on Schedule A (Form 1040).
- 2. You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender.
- 3. The mortgage must be a secured debt on a qualified home.
A “secured debt” is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:
- Makes your ownership in a qualified home security for payment of debt.
- Provides, in any case of default, that your home could satisfy the debt.
- Is recorded or satisfies similar requirements under state law.
In other words, your mortgage is secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt.
For a loan to be “secured”, it must be recorded or satisfy similar requirements under state law. For example, if a relative gives you a loan to help you purchase a home, the relative must take the legal steps required to record the loan with local authorities; otherwise, you may not deduct interest that you pay on the loan.
A “qualified home” means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities.
Mortgage Tax Deduction Categories
If all of your mortgages fit into one or more of the following categories at all times during the tax year, you can deduct all of the interest on your mortgage on your tax return.
- 1. Mortgage Tax Deduction you took out on or before October 13, 1987. This is known as “Grandfathered Debt“.
- 2. Mortgage Tax Deduction you took out after October 13, 1987 to buy, build, or improve your home. These loans are called “home acquisition loans”, or “home acquisition debt” and up to $ 1 million of such debt qualifies for a mortgage interest deduction ($ 500,000 or less if married filing separately).
- 3. Mortgage Tax Deduction you took out after October 13, 1987 other than to buy, build, or improve your home. This is called “Home Equity Debt“. You may deduct up to $100,000 of such debt for the home interest deduction ($50,000 or less if married filing separately).