BROWSE HOW TOs

How to Deduct Home Mortgage Loan Interest

By eHow Personal Finance Editor

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Home mortgage loan interest can be deducted from your income and significantly reduce your taxes. Mortgage interest on a second home can also be deducted.

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Instructions

Difficulty: Moderately Easy

Things You’ll Need:

Financial Statements
Financial Calculator
Paper And Pencils
Computers
Tax Preparation Software

Step1

Add up all expenses you can itemize as deductions to make sure the total is greater than your standard deduction. The main itemized deductions are state taxes, mortgage interest, home equity loan interest, property taxes and charitable contributions. The standard deduction is $7,200 if married filing jointly, $6,350 if head of household, $4,300 if single and $3,600 if married filing separately. If your total itemized deductions are less than your standard deduction, it's better that you not deduct home mortgage interest.

Step2

Obtain a Schedule A form to fill in with itemized deductions. The third section of Schedule A is for interest deductions.

Step3

Write on Schedule A the name of the bank or mortgage company to which you paid mortgage interest, and write the amount you paid during the tax year. The lending institution is required to send you a Form 1098 with this information.

Step4

Write on Schedule A the name of anyone else you paid interest to for a mortgage loan, and write the amount you paid during the tax year. Individuals who make mortgage loans are not required to send you a Form 1098.

Step5

Write on Schedule A the name of the lending institution and the amount you paid in the tax year in points to obtain the loan, but only if the loan was to purchase your main home. Points for refinanced loans or for loans for a second home have to be deducted over the life of the loan, not at one time. The institution will send you a Form 1098 listing the points you paid.

Step6

Continue with the rest of Schedule A.

Tips & Warnings

You can deduct home mortgage interest on a first home and a second home, but not on any other homes.
Keep good records if you're deducting points over the life of the loan (usually for a refinanced home or second home). When you sell the home or refinance it, you can deduct all the points you have not yet deducted.
If you prepay your January mortgage payment in December, you'll get the deduction in the earlier tax year.
To deduct home mortgage interest, you must own the home and you must pay the interest. If you pay the interest but don't own the home, it doesn't count. If you own the home but don't pay the interest, it doesn't count.
If your home mortgage loan was obtained after October 13, 1987, you can deduct the interest on a maximum of $1 million in mortgages, or $500,000 if married filing separately.
If the points were paid from the mortgage (or loan) proceeds and not out of your pocket, you have to deduct them over the life of the loan.
If your mortgage loan was sold by one financial institution to another, as often occurs, the original lender may send you its Form 1098 at the time of the sale and not at the end of the year. Remember that this may be the only notification of the mortgage loan interest paid to that lender, and be sure to include this amount on your Schedule A.