Written by Jason Kritzberg on February 26th, 2021
What is Mortgage Interest Deduction?
The mortgage interest deduction is a tax deduction for mortgage interest paid on the first $1 million of mortgage debt. In simpler terms, it is a way for homeowners to deduct the interest they pay on any loan; whether that is used to pay off a build, a purchase, or to make improvements on their residence, for taxable income. This specific deduction is actually offered as an incentive for homeowners. The amount that’s deductible is reported each year by the mortgage company on a 1098 Form.
So, How Does it Work?
This incentive allows you to reduce your taxable income by the amount of money you already paid in mortgage interest during the past year. So if you still have mortgage on your property, keep paying it off every month and on time! The interest that you’re paying on your home loan could help cut your tax bill come tax season.
The mortgage interest deduction allows you to deduct on the first $1 million of your mortgage debt for your primary or a secondary home (ie. a vacation home or rental property). If you bought a property after December 15, 2017, then good news for you! As of today, you can deduct the interest you paid on the first $750,000 of your mortgage! However, if you bought a home in 2020, the deduction might be a bit smaller. This is because the 2017 Tax Cuts and Job Act limited the deduction to the interest.
What am I Allowed to Deduct?
The mortgage interest deduction allows you to deduct on a mortgage of your main home if it is a: property that is a house, co-op apartment, condo, mobile home, house trailer, or a house boat. The home must have collateral for the loan and have sleeping, cooking, and toilet facilities to count.
You can also deduct off a second home. You don’t have to use the home during the year, it can be collateral for the loan, and it can be rented out; however, you have to be present in the home for more than 10% of the number of days you rented it out.
What is Not Mortgage Interest Deductible?
You are not allowed to deduct homeowners insurance, extra principle payments you make on your mortgage, title insurance, settlement costs (most of the time), deposits, down payments, earnest money that you forfeited, or interest accrued on a reverse mortgage.
To learn more about Mortgage Interest Deductions or if you need help with finding a new home, please give your local Los Angeles realtor, Stephen White, a call. We have well trained professionals that are ready to help you at any given notice!