Deducting Mortgage Interest

How much can I deduct from my home mortgage?
What if I want to pay cash for my home?
Can I deduct if purchasing a second home?
How much can I deduct if using my home for business?

Interest that you pay on your mortgage is tax deductible, within limits. If you’re married and filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first or second home.  This $1 million deduction does not apply if you pay cash for your home and later use it as collateral for an equity loan.

Is your home meeting the qualification status?  This is important when you have more than one home, and are using it for business or an additional residence.

The IRS states the following in publication 936:

Qualified Home

For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

Main home.   You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home.   A second home is a home that you choose to treat as your second home.

Second home not rented out.   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out.   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527.

More than one second home.   If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home during the year in the following situations.

  • If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
  • If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
  • If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.

Divided use of your home.   The only part of your home that is considered a qualified home is the part you use for residential living. If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. (See Home Acquisition Debt in Part II.) Dividing the fair market value may affect your home equity debt limit, also explained in Part II .

Renting out part of home.   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply.

  • The rented part of your home is used by the tenant primarily for residential living.
  • The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
  • You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.

Office in home.   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest.

Home under construction.   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.