How Can I Qualify for the Mortgage Tax Deduction?

The mortgage tax deduction is one of the biggest benefits of buying a home since you can deduct the interest paid on your mortgage. The interest deduction is defined by any interest you pay on a loan that is secured by the main home or second home.

Interest can be deducted on up to one million dollars of home mortgage debt, whether it is used to purchase a first or a second home. 

You can also deduct the interest on up to $100,000 of home equity debt, even if you don't use the money for home improvements. But it does have some drawbacks—including not applying to some buyers.

Understanding the mortgage tax deduction:

To begin with, let’s go over what types of mortgages qualify for the deduction.

If your mortgage falls into one or more of the following, you can deduct all of the interest you’ve paid:

• A mortgage that you took out on your main home and a second home on or before October 13, 1987 (called "grandfathered" debt. This is a mortgage that existed before the current tax rules for mortgage interest took effect).
   
• A mortgage that you took out after October 13, 1987, to purchase, build or improve upon your main home and second home (typically referred to as acquisition debt) that totaled $1 million or less throughout 2010 (or $500k if you are married and you file separately from your partner).
   
• Any home equity debt that you have taken out after October 13, 1987, on your main home and the second home that totaled $100,000 or less through the year of 2010 (again, divided by half to $50k if you are married and filing separately). Home equity debt interest is usually deductible no matter how you use the money received from the loan, assuming the combined balances of acquisition debt and home equity are not more than the property's fair market value at the time you take out the home equity debt.

How much can you claim?

The value of the mortgage tax deduction varies depending on the amount of your mortgage. To claim it, you’ll have to itemize your deductions, and they must be above the sum of the standard deduction-- $5,800 for single people, and $11,600 for married couples filing jointly.

Also, since most mortgages require you to pay a lot of interest at the beginning of your loan term, you’ll find yourself paying less and less in interest with each year that passes. The standard deduction increases frequently, so you may find yourself falling below the qualifying mark as time goes by.

Many smaller mortgages do not even make the mark, to begin with, illustrated in this example from Generation X Finance:

“Let’s say you buy a $150,000 house and put 20% down and finance the rest at 5%. Guess what? In the first year, you’ll pay less than $6,000 in mortgage interest. 

Even if you had a $2,000 property tax bill, a married couple would still fall over $3,000 short of meeting the standard deduction. So, unless you were able to come up with significant itemized deductions elsewhere, you’d have no reason to claim any mortgage interest deduction.  

As you can see, many homeowners who buy modest homes, especially in the low mortgage rate environment we have now, won’t even see the tax benefits that everybody loves to talk about.”

Do your homework.

You should check that your home qualifies for the mortgage tax deduction. The property must have sleeping, cooking, and toilet facilities. Many types of dwellings are accepted as long as they have these three things, including mobile homes, travel trailers, boats, and even second homes. 

However, if you are deducting the interest from your second home, you must use it a minimum of 14 days out of the year.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.