When Is Mortgage Interest Tax Deductible?
2022 tax season is upon us, and if you are a homeowner you are likely wondering how to take advantage of mortgage interest tax deductions.
IRS rules regarding mortgage interest tax deductions can be very complicated. As you look ahead to tax season, here’s a guide to help you understand what interest qualifies for the deduction and how you can benefit if you’re eligible.
1. You must itemize your deductions
You cannot take the mortgage interest deduction if you are taking the standard deduction. In 2022, the standard deduction is $12,950 for single taxpayers, $19,400 for heads of household, and $25,900 for married taxpayers filing a joint return.
You can only deduct mortgage interest if you itemize your deductions. If you’re taking the standard deduction, you can disregard the rest of this information because it won’t apply.
2. Your home must be a “qualified residence”
Mortgage interest is only deductible if the mortgage is attached to a “qualified residence“. Taxpayers can generally deduct the mortgage interest on two qualified homes: one primary home and one vacation home.
3. Your mortgage must be classified as “acquisition indebtedness”
Your mortgage or home equity line of credit is considered “acquisition indebtedness” if it was used to buy, build, or improve a qualified residence. Generally, you can deduct the interest on mortgage balances up to $750,000 of Acquisition Indebtedness. Here are two examples:
- Jane buys her $500,000 primary residence using a $400,000 mortgage. Jane would be able to deduct the interest on the $400,000 mortgage as acquisition indebtedness because (1) the mortgage was to buy a qualified residence; and, (2) the mortgage falls within the $750,000 limit.
- Janice buys her $500,000 primary residence with cash. A year later, Janice does a cash-out refinance and puts a $400,000 mortgage on the home. The funds are not used for home improvements. Janice would NOT be able to deduct the interest on the new $400,000 mortgage because the funds were not used to buy, build, or improve the house.
4. There is a $1M acquisition debt limit on pre-2017 loans
Your acquisition debt limit is $1 million if you closed on your home loan prior to December 16, 2017, and the loan qualified as acquisition indebtedness at that time. You can keep that $1 million limit if you refinance that home loan as long as you do not increase the current balance on the loan.
For example, if your current balance is $950,000, the new loan you’re refinancing into can’t be more than $950,000. This is also true when consolidating or refinancing a home equity loan or line of credit taken out prior to December 16, 2017, as long as you used that home equity loan to buy, build or improve a qualified residence. In that case, your combined aggregate total limit would be $1 million, whether you keep both loans separate, or whether you consolidate them into a single loan.
5. Understand the distinction between a qualified residence and an investment property
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.
There are lots of exceptions to the standard mortgage interest tax deduction rules, but the guidelines above should help most people understand whether they’re eligible for this deduction and will benefit from it. We advise you to speak with a licensed tax professional about your situation before taking any next steps. If you'd like to speak to an Art of Homeownership professional, they will be able to advise you based on your unique situation.