How to Deduct Interest and Taxes Paid on Your Home

You can usually deduct the interest that you pay on a mortgage for your primary residence or a second home if you use the equity in the home to secure the debt. Unsecured debts are considered to be personal loans, therefore, any interest you pay is not deductible. The interest paid on a mortgage loan to purchase a home, a second mortgage, a home equity loan or line of credit all may be considered as deductible interest on your federal income tax return. You can also deduct any local or state real estate taxes paid on the property.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Form 1040 Schedule A and Instructions for Schedule A

1. Determine if the property meets the IRS definition of being a home. A home can be a single-dwelling house or duplex unit, mobile or modular home, condominium, recreational vehicle or houseboat, depending on whether it has sleeping, kitchen and bathroom amenities. You can deduct interest paid on up to $1,000,000 of mortgage debt borrowed to purchase or improve your home if you are married filing jointly and the mortgage does not exceed the fair market value of the property.

2. Take the mortgage interest deduction only if you are the primary borrower named on the mortgage loan, unless both you and your spouse signed for the loan, in which case, you both are primary borrowers. For many taxpayers, this is the largest deduction that they can claim. Unless you co-sign for a mortgage loan for someone else, you may not deduct the mortgage interest paid on that loan even if you make the monthly mortgage payments.

3. Use IRS Form 1040 Schedule A if you are itemizing deductions and want to claim the home mortgage interest deduction and the deduction for real estate taxes. Report the deduction for the total mortgage interest you paid for the year on Line 10 of Schedule A.

4. Deduct the amount of real estate taxes paid during the year on any homes that you own, whether you pay the taxes directly to the taxing authorities yourself, or a portion of your monthly mortgage payment goes into an escrow account from which your lender pays the taxes when they come due. Deduct only the actual amount of real estate taxes paid on the property on Line 6 of Schedule A. Property taxes are based on the assessed value of the property.

5. Keep a copy of Form 1098, Mortgage Interest Statement, which you will receive from your lender at the end of the year. This statement is often included as part of your January monthly mortgage statement. File the statement with your other tax records, as it shows the amount of interest and points that you paid on the home for the year. Points or loan origination fees are actually prepayment of interest, and therefore, may be deducted in the year in which they are paid. The amount shown as interest paid on Form 1098 is the amount you can deduct on your tax return.

Tips & Warnings

• In some cases, you may be able to deduct a late payment charge as home mortgage interest. Talk to your tax adviser. You are not required to live in your second home at any time throughout the year, but you may not rent it out or sell the home to anyone else, or you will not qualify to claim any of the mortgage interest paid on the home as a tax deduction.
• If you own more than two homes, the mortgage interest that you pay on those homes will not qualify for a tax deduction.

Resources

• IRS forms and instructions