When you have a mortgage, there’s a deduction you can take on your taxes for the interest you pay on your first $1 million of debt. If you’re a homeowner who bought your home after December 15, 2017, you can deduct interest on the first $750,000 of your mortgage. If you are going to claim a mortgage interest deduction, you have to itemize your tax return.
The following is a guide to what to know about the mortgage interest deduction and how it works.
The mortgage interest deduction lets you reduce taxable income by the amount you pay on the interest of your mortgage during the year. If you have a mortgage and keep up your records, you can lower your tax bill. Generally, as mentioned, you can deduct the interest paid on the initial $1 million of your mortgage for a primary or second home. For buyers who purchased after December 15, 2017, you can deduct what you paid on the first $750,000.
If you’re deducting mortgage interest for your primary home, typically, the following will count:
If you have a mortgage on a second home, the following will qualify you:
Points are prepaid interest you can get on a loan. You can deduct your points gradually through the life of your loan, or if you meet certain requirements, you can deduct them at the same time. The eight requirements you have to meet to deduct your points all at once include:
If you have a late payment charge that wasn’t for a specific service done in relation to your mortgage loan, you can deduct that. If you pay your mortgage early, you might have a prepayment penalty. You can deduct that penalty as interest.
You can deduct the interest if you have a home equity loan and use it to buy, substantially improve, or build a home. If you use the money for something not related to your home, it’s not deductible.
Finally, the things that aren’t deductible include extra principal payments you make on your mortgage, homeowners’ insurance, title insurance, and settlement costs for the most part. Down payments, earnest money, or deposits you forfeit aren’t deductible or interest on a reverse mortgage.
To claim a mortgage interest deduction, start by looking for your Form 1098, which your lender sends in January or the start of February. Form 1098 outlines how much you paid in interest and points during the year. Your lender will send a copy to the IRS as well. If you paid at least $600 in mortgage interest, which includes points, you’d get a 1098.
You’ll need to itemize your taxes rather than taking the standard deduction when you complete your taxes.
Once you close on your new home, you may be able to move in as soon as the paperwork is completed unless the seller has asked for different terms, but those will already be in your contract.