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The Mortgage Interest Deduction 2019: A Guide To Limits and What Qualifies

9-minute read

November 10, 2020

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There isn’t much that gets people excited when it comes to taxes, except when it comes to the topic of deductions. Tax deductions are certain expenses you incur throughout the tax year that you can subtract from your taxable income, thus lowering the amount of money you have to pay taxes on.

And for homeowners who have a mortgage, there are additional deductions they can include. Mortgage interest deduction is one of several homeowner tax deductions provided by the IRS. Read on to learn more about what it is and how to claim it on your taxes this year.

What Is The Home Mortgage Interest Deduction?

Mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to count interest they pay on a loan related to building, purchasing or improving their home against their taxable income, lowering the amount of taxes they owe. This deduction can also be taken on loans for second homes, as long as it stays within the limits.

Mortgage Interest Deduction Limit

Signed in 2017, the Tax Cuts and Jobs Act changed individual income tax by lowering the mortgage deduction limit and putting a limit on what you can deduct from your home equity loan debt.

Before the Tax Cuts and Jobs Act, the mortgage interest deduction limit was $1 million. Today, the limit is $750,000. That means this tax year, single filers and married couples filing jointly can deduct the interest on up to $750,000 for a mortgage, while married taxpayers filing separately can deduct up to $375,000 each.

However, there are a few exceptions:

  • Any mortgage taken out before October 13, 1987 is considered grandfathered debt and is not limited. All of the interest you paid is fully deductible.
  • Any home purchased after October 13, 1987 and before December 16, 2017 is still eligible for the $1 million limit ($500,000 each, if married and filing separately).
  • Any home that was sold before April 1, 2018 is eligible for the $1 million limit –  ONLY if there was a binding contract entered before December 15, 2017 to close before January 1, 2018 and the home is purchased before April 1, 2018.

What Loans Qualify For This Deduction?

There are a few types of home loans that qualify for the mortgage interest tax deduction. These include a home loan to buy, build or improve your home. While the typical loan is a mortgage, a home equity loan, line of credit or second mortgage may also qualify. You can also use the mortgage interest deduction after refinancing your home. Just make sure the loan meets the previously listed qualifications (buy, build or improve) and that the home in question is used to secure the loan.

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How To Claim The Mortgage Interest Deduction On Your 2019 Tax Return

Tax forms can help walk you through your filing step by step. Knowing which forms to fill out can be confusing. To make sure you are getting and filing the right form, follow these steps for deducting your mortgage interest on your 2019 taxes.

Standard Deduction Or Itemized Deduction?

If you choose the standard deduction, you will not need to complete more forms and provide proof for all of your deductions. It’s more of the “no questions asked” deduction, with a flat-dollar amount that is the same for most people. For the 2019 tax year, the standard deduction is:

  • $12,200 for single filing status
  • $24,400 for married, filing jointly
  • $12,200 for married, filing separately

If you choose an itemized deduction, you can pick and choose from various deductions. These include mortgage interest, student loan interest, charitable contributions, medical expenses and more. To itemize your deductions, you’ll need to fill out additional forms to list each one and provide records, receipts and other documents that validate them.

Both standard and itemized deductions reduce your taxable income. So how do you decide which one to do? It comes down to which method saves you more money. If your standard deduction is less than your itemized deduction, take the standard deduction. Or vice versa.

Here’s an example: You itemize the following deductions: mortgage interest ($6,000), student loan interest ($1,000), charitable donations ($1,200). These deductions add up to $8,200. In this case, you would want to take the standard deduction of $12,200 instead because you would get $4,000 more deducted from your taxable income.

Now let’s say your mortgage interest is $11,000 and the other deductions remain the same. Your itemized deductions would total $13,200. In this case, you would want to take the itemized deduction, because it reduces your taxable income $1,000 more than the standard deduction would.

Don’t forget: If you are paying someone to prepare your taxes for you, it may cost more to have them itemize your taxes since this requires more work. Make sure you factor in the extra cost when deciding which method saves you the most money.

One of the most important things to know about taking either the itemized or standard deduction is that you cannot take both. You must choose one or the other.

Get Your 1098 From Your Lender

To fill out the information about the interest you paid for the tax year, you’ll need the Form 1098 from your mortgage lender. This document details how much you paid in mortgage interest and points during the past year. It is the proof you’ll need for your mortgage interest deduction. Your lender will provide the form for you at the beginning of the year, before your taxes are due. If you don’t receive it by mid-February or need help reading your form, contact your lender. Keep in mind, you will only get a 1098 Form if you paid more than $600 of mortgage interest. If you paid less than $600 in mortgage interest, you can still deduct it.

Choose The Correct Tax Forms

You’ll need to itemize your deductions to claim the mortgage interest deduction. Since mortgage interest is an itemized deduction, you’ll use Schedule A (Form 1040), which is an itemized tax form that’s in addition to the standard 1040 form. This form also lists other deductions, including medical and dental expenses, taxes you paid and gifts to charity. You can find the mortgage interest deduction part on line 8 of the form. You’ll put in the mortgage interest information found on your 1098 in that section. Pretty easy.

Now comes the tricky part. If you make money from the home – whether using it as a rental property or using it for your business – you’ll need to fill out a different form. That’s because the way interest is deducted from your taxes depends on how you used the loan money, not on the loan itself.

If you are deducting the interest you pay on rental properties, you must use Schedule E (Form 1040) to report it. This form is used for supplemental income from rental real estate. If you use part of your house as a home office or if you use money from your mortgage for business purposes, you may need to fill out a Schedule C (Form 1040 or 1040-SR) to report it. This form is used for profit or loss from a business you owned or operated yourself. You’ll list mortgage interest as an expense on both of these forms.

Whatever mortgage interest you are deducting and whatever form you are using, it’s important to know what qualifies as interest and what isn’t deductible. If you are itemizing your deductions, read on.

What Qualifies As Mortgage Interest?

There are a few payments you make that may count as mortgage interest. Here are several you may consider deducting:

Interest on the mortgage for your main home. This property can be a house, co-op, apartment, condo, mobile home, boat or similar property. However, the property will not qualify if it does not have basic living accommodations, including sleeping, cooking and bathroom facilities. The property must also be listed as collateral for the loan you are deducting interest payments from. You can also use this deduction if you got a mortgage to buy out an ex’s half of the property in a divorce.

You can still deduct mortgage interest if you receive a nontaxable housing allowance from the military or through a ministry or have received assistance under a State Housing Finance Agency Hardest Hit Fund, an Emergency Homeowners’ Loan Program or other assistance programs. However, you can only deduct the interest you pay. You cannot deduct any interest that another entity pays for you.

Interest on the mortgage for a second homeYou can use this tax deduction on a mortgage for a home that is not your primary residence as long as the second home is listed as collateral for that mortgage. If you rent out your second home, there is another caveat. You must live in the home for at least 14 days or more than 10% of the days you rent it out, whichever is longer.

Mortgage points you have paid. When you take out a mortgage, you may have the option to pay mortgage points, which pay some of your loan interest upfront and in advance. Each point, which typically costs about 1% of your mortgage amount, can get you about .25% off of your mortgage rate. Mortgage points are paid at closing and must be paid directly to the lender to qualify for the deduction.

Late payment charges on a mortgage payment. As long as the charge wasn’t for a specific service, you can deduct late payment charges as home mortgage interest. However, just because you can deduct this, you should not ever make late payments to your mortgage as this can result in damage to your credit score and other penalties.

Prepayment penalties. Some lenders will charge you if you pay your mortgage off early. If you have to pay a prepayment penalty, you can deduct that as mortgage interest. However, the penalty must be from paying the loan off early and cannot be from a service or additional cost incurred from the loan.

Interest on a home equity loanA home equity loan is money borrowed from the equity you have in the home. You can receive it in a lump sum or a line of credit. For the interest you pay on a home equity loan to qualify, the money from the loan has to be used to buy, build or “substantially improve” your home. If the money is used for other purposes, such as buying a car or paying down credit card debt, the interest isn’t deductible.

Interest you pay before you sell the home. If you sell your home, you can still deduct any interest you paid before the home was sold. So, if you sold the home in June, you can deduct interest you paid January through May or June, depending on when you made your last mortgage payment on the home.

What’s Not Deductible

Mortgage interest isn’t the only expense you’ll incur when you purchase and own a home. Many people believe these other expenses are tax-deductible, but they aren’t. Here’s a list of some of the most common expenses that are mistaken for being tax-deductible: 

  • Mortgage insurance premium. This deduction expired on December 31, 2017.
  • Homeowners insurance
  • Other closing costs, including title insurance
  • Moving expenses (unless active duty military)
  • Deposits, down payments or earnest money you forfeited
  • Interest accrued on a reverse mortgage. Since you don’t pay interest until the loan comes due, you can’t get a deduction on something you aren’t paying yet.
  • Any payments made while living in the home before the purchase was finalized. These payments are considered rent.

Remember, the mortgage loan’s interest can only be deductible if the home you purchased with the loan is used as collateral. For example, if you own a rental property and borrow against it to purchase a home, the interest doesn’t qualify because the home isn’t being used as collateral, the rental property is instead.

Special Circumstances

No two situations are alike, so naturally, there’ll be odd circumstances regarding the mortgage interest deduction. Here are a few examples:

  • If you are a co-op apartment owner, you can deduct your share of the interest you pay on the building’s total mortgage.
  • If you rented out part of your home, you can treat the rented portion as part of your living space. You can do this as long as the rented portion is used as living space, it does not have separate sleeping, cooking and toilet facilities, and you don’t rent to more than two people, who have separate sleeping spaces.
  • If the home was a timeshare, you can treat it as a home or second home and deduct mortgage interest as long as it meets the standard requirements.
  • If the house is under construction, it can still qualify for up to 24 months as long as it becomes your qualified home after construction is complete.
  • If you used part of mortgage proceeds to pay debt, invest in a business or for something else unrelated to buying a house.
  • If your house was destroyed, it may still qualify for mortgage interest deduction, but you must rebuild the home and move back in or sell the land within a reasonable period of time.
  • If you were divorced or separated and you or your ex paid the mortgage on a home you both own, you or your ex can deduct half of the total payments you made. The other person must include the other half as alimony.

For even more special circumstances, check out Pub. 936 from the IRS, which covers the rules and guidelines for mortgage interest tax deduction in 2019.

Need More Tax Help?

Consult your financial advisor or tax professional to get more assistance with your 2019 taxes. They can provide even more information about your mortgage interest deduction and help you decide what to deduct based on the type of loan you have and your financial situation.

See What You Qualify For