When Is Mortgage Interest Tax Deductible? (Updated for 2020)

2020 mortgage interest deduction guidelines: 

You might be able to deduct mortgage interest on your taxes if you itemize and follow a few other guidelines.

Mortgage interest is still deductible, but with a few caveats:

• Taxpayers can deduct mortgage interest on up to $750,000 in principal.
• The debt must be "qualified personal residence debt," which generally means the mortgage is backed by either a primary residence, second/vacation home, or by home equity debt that was used to substantially improve one of these residences.
• Investment property mortgages are not eligible for the mortgage interest deduction, although mortgage interest can be used to reduce taxable rental income.
• Home equity debt that was incurred for any other reason than making improvements to your home is not eligible for the deduction.

What is the mortgage interest deduction?

The mortgage interest deduction is a tax deduction that for mortgage interest paid on the first $1 million of mortgage debt. Homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return.

The mortgage interest deduction is alive and well in 2020. Here’s a look at how it works and how you can save money at tax time.

How the mortgage interest deduction works in 2020

The mortgage interest deduction allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year. So if you have a mortgage, keep good records — the interest you’re paying on your home loan could help cut your tax bill.

As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.

For example, if you got an $800,000 mortgage to buy a house in 2017, and you paid $25,000 in interest on that loan during 2019, you probably can deduct all $25,000 of that mortgage interest on your tax return. However, if you got an $800,000 mortgage in 2019, that deduction might be a little smaller. That’s because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.

There’s an exception to that Dec. 15, 2017, cutoff: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained prior to Dec. 16, 2017.

What qualifies as mortgage interest?

IRS Publication 936 has all the details, but here’s the list in a nutshell.

Interest on a mortgage for your main home

• The property can be a house, co-op, apartment, condo, mobile home, house trailer or a houseboat.
• The home has to be collateral for the loan.
• The home must have sleeping, cooking and toilet facilities to count.
• If you get a nontaxable housing allowance from the military or through the ministry, you can still deduct your home mortgage interest.
• A mortgage that you get in order to “buy out” your ex’s half of the house in a divorce counts.

Interest on a mortgage for your second home

• You don’t have to use the home during the year.
• The house has to be collateral for the loan.
• If you rent out the second home, you have to be there for the longer of at least 14 days or more than 10% of the number of days you rented it out.

Points you paid on your mortgage

• Points are a form of prepaid interest on your loan. You can deduct points little by little over the life of a mortgage, or you can deduct them all at once if you meet every one of nine requirements.
• In general, the nine requirements are that the mortgage has to be for a your main home, paying points is an established practice in your area, the points aren’t unusually high, the points aren’t for closing costs, your down payment is higher than the points, the points are computed as percentage of your loan, the points are on your settlement statement and you use the cash method of accounting when you do your taxes.

Late payment charges on a mortgage payment

Prepayment penalties

Interest on a home equity loan

• You have to use the money from the home equity loan to buy, build or “substantially improve” your home.
• If you use the money to buy a car, pay down credit card debt, or pay for something else not home-related, the interest isn’t deductible.

Mortgage insurance premiums

• This includes the amount paid for private mortgage insurance, FHA mortgage insurance premiums, USDA loan guarantee fees and VA funding fees.
• The insurance contract must have been issued after 2006.
• You can’t deduct the cost of mortgage insurance if your adjusted gross income is more than $109,000, or $54,500 if married filing separately, on Form 1040 or 1040-SR, line 8b.
• The amount you can deduct is reduced if your adjusted gross income is more than $100,000 ($50,000 if married filing separately).

What’s not deductible

• Homeowners insurance
• Extra principal payments you make on your mortgage
• Title insurance
• Settlement costs (most of the time)
• Deposits, down payments or earnest money that you forfeited
• Interest accrued on a reverse mortgage

Note, for more details contact your tax professsional.

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Aundrea Beach-Greco
Mortgage Advisor, CMPS
NMLS 333739
702-326-7866