Mortgage Interest Deduction: Limit, How It Works - NerdWallet (2024)

FAQs

How does the mortgage interest deduction limitation work? ›

You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.

Divide the maximum debt limit by your remaining mortgage balance, then multiply that result by the interest paid to figure out your deduction. Let's consider an example: Your mortgage is $1 million. Since the deduction limit is $750,000, you'll divide $750,000 by $1 million to get 0.75.

In a nutshell — yes. But let's be clear. We're talking about the interest portion of your mortgage payment that you make each month. The deduction doesn't apply to the mortgage principal, nor the down payment or mortgage insurance premiums (after tax year 2021).

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness.

The mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. Homeowners can also claim the deduction on loans for second homes providing that they stay within IRS limits.

You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebt- edness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from in- debtedness incurred before December 16, 2017.

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn't deductible. Your home mortgage must be secured by your main home or a second home. You can't deduct interest on a mortgage for a third home, a fourth home, etc.

Using a percentage of your income can help determine how much house you can afford. For example, the 28/36 rule may help you decide how much to spend on a home. The rule states that your mortgage should be no more than 28 percent of your total monthly gross income and no more than 36 percent of your total debt.

For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. If your lender can give you your average balance for the year, you can use that amount.

How much interest can I write off? You can deduct the interest you paid on the first $750,000 of your mortgage during the relevant tax year. For married couples filing separately, that limit is $375,000, according to the Internal Revenue Service.

Is mortgage interest deductible if you don't itemize? ›

The home mortgage deduction is a personal itemized deduction that you take on IRS Schedule A of your Form 1040. If you don't itemize, you get no deduction. You should itemize only if your total itemized deductions exceed the applicable standard deduction for the year.

In the beginning, the majority of your mortgage payments will be interest. As you repay the principal, however, less interest will accrue, and a higher percentage of your payments will go towards the principal. As you reach the end of your mortgage payments, nearly all of your payments will go towards the principal.

A general rule of thumb is the person paying the expense gets to take the deduction. In your situation, each of you can only claim the interest that you actually paid. In order to claim the deduction you must have a legal ownership in the property and a responsibility to pay the mortgage.

However, for mortgage debt incurred on or after December 15, 2017, the MID is limited to interest incurred on the first $750,000 of debt on primary and secondary residences, meaning homeowners with newer mortgage loans have a lower limit to how much they can reduce their tax burden.

Income to afford a $750K house

That equates to a monthly income of $14,400, with 28 percent of that amounting to $4,032. So $4,032 is the maximum you should spend on monthly housing costs, including principal, interest, property taxes, insurance premiums and any HOA fees. That's less than the $4,800 estimated above.

General Interest Deduction Limitation Rule:

Article 30 provides information on the general interest deduction limitation rule. 1) As a business, you can deduct up to 30% of your accounting earnings before interest, taxes, depreciation, and amortization (EBITDA) as net interest expenditure for the relevant tax period.

The current $750,000 limitation was introduced as part of the Tax Cuts and Jobs Act (TCJA) and will revert to the old limitation of $1 million after 2025. Though the deduction is often viewed as a policy that increases the incidence of homeownership, research suggests it does not accomplish this goal.

Mortgage Interest vs.

As of the latest guidelines, the limit is $750,000 for married couples filing jointly and $375,000 for those filing as single or married filing separately. This includes the combined debt of both the primary and second residences.