Taxpayers may deduct certain types of interest when itemizing deductions. The two primary categories are home mortgage interest and investment interest.
Home Mortgage Interest
The home mortgage interest deduction applies only to qualifying debt—loan proceeds used to buy, build, or substantially improve the home securing the loan.
A home mortgage includes:
- First mortgages
- Second mortgages
- Home equity loans
- Refinanced mortgages
A qualified home may be a house, condo, cooperative unit, mobile home, boat, or similar property, as long as it provides:
- Sleeping space
- Toilet
- Cooking facilities
A surviving spouse may deduct mortgage interest paid after the decedent’s death.
Qualifying Debt Limits
The maximum amount of debt treated as qualifying depends on when the debt was incurred:
- $750,000 ($375,000 MFS) for debt incurred after Dec. 15, 2017
- $1,000,000 ($500,000 MFS) for debt incurred on or before Dec. 15, 2017
- $1,000,000 ($500,000 MFS) for refinanced pre‑Dec. 16, 2017 debt, limited to the prior balance
Interest on loan proceeds not used to buy, build, or substantially improve the home is not deductible.
Requirements for Deductibility
Home mortgage interest is deductible only if:
- The taxpayer files Form 1040 and itemizes on Schedule A
- The taxpayer is legally liable for the loan
- A true debtor‑creditor relationship exists
- The taxpayer has an ownership interest in the home securing the loan
If the taxpayer sells the home, they may deduct interest paid up to but not including the date of sale.
If $600 or more of mortgage interest is paid, the lender issues Form 1098.
Points
Points are charges paid to obtain a mortgage. Generally, points are amortized over the life of the loan.
A taxpayer may deduct points in full in the year paid if:
- The loan is used to buy, build, or substantially improve the main home
- Paying points is common in the area
- The amount is typical for the area
- The taxpayer uses the cash method
- Points are not substitutes for separately stated fees (appraisal, inspection, title, taxes)
- Points are not financed into the loan
- Points are computed as a percentage of principal
- Points appear clearly on the settlement statement
Points on loans for second homes or refinances must be amortized, not fully deducted.
Points on loans unrelated to buying, building, or improving the home are not deductible.
Investment Interest
Investment interest is interest paid on loans used to buy property held for investment.
Rules:
- Deduction is limited to net investment income
- Unused amounts may be carried forward
- Interest related to tax‑exempt income is not deductible
Taxpayers generally use Form 4952 unless:
- Interest + ordinary dividends (minus qualified dividends) exceed investment interest expense
- The taxpayer has no other deductible investment expenses and no carryovers