Mortgage Tax Deductions: Principal and Interest

As you transition from curious homebuyer to official homeowner, it is important to prepare for the new expenses that come with homeownership. Mortgage payments, real estate taxes, insurance, property repairs, home improvement projects, and more are all a part of the deal.

Despite the costs associated with your new home, the good news is that there are mortgage tax benefits and deductions that you now have access to. But what exactly are these deductions all about? And what do you need to know in order to best prepare for tax season? Read on to discover how you can save money as a homeowner before it is time to submit your taxes this year.

What are mortgage interest tax deductions?

When it comes to your taxes, the mortgage interest deduction is considered an itemized deduction that helps homeowners lower the amount of taxes they may owe by subtracting mortgage interest paid from their taxable income. It is one of a few homeowner reductions provided by the Internal Revenue Service (IRS).

However, this tax incentive is not available to those who file the standard deduction on their return. The mortgage interest deduction requires that you itemize this interest, along with other eligible expenses, by filing a Schedule A (form 1040 or 1040-SR).

Standard versus itemized deductions

It is important to know there are two deduction options on your federal tax return. You can either take the standard deduction or itemized deductions.

Here are the standard deductions for 2024:

• Single or married individuals filing separately – $14,600

• Married couples filing jointly – $29,200

• Head of household – $21,900

The only way to claim the mortgage tax credits we have discussed is if you itemize deductions. Before you decide to itemize, be sure your total deduction is greater than the amount of the standard deduction. We recommend using a mortgage interest tax calculator if you would like to estimate your deduction and consult a tax advisor before deciding. Remember, the goal is to choose the option that saves you more money.

The IRS details the type of expenses homeowners can and cannot deduct in Publication 530: Tax Information for Homeowners.

What is considered deductible mortgage interest?

Any interest that you have paid on a loan that is secured by a residential property or second home is considered deductible mortgage interest. This also includes loans or refinances that have been used to buy, build, or pay for substantial home improvements.

The IRS allows single or joint filers to deduct interest paid on the first $750,000 of their mortgage ($375,000 if married and filing separately). For loans taken out before December 16, 2017, the IRS allows single or joint filers to deduct interest paid on the first $1 million of their mortgage ($500,000 if married and filing separately). It is also important to note that this deduction is only applicable to loans secured through your home, so it does not apply to interest paid on personal loans. This tax benefit is also only available to the primary borrower who is legally responsible for making the payments on the mortgage.

Are principal payments tax deductible?

The principal of a mortgage is the amount you borrow for the loan. A portion of your mortgage payment goes toward the principal thereby reducing the loan balance. This portion of your mortgage payments is not tax deductible.

Can I write off mortgage interest?

In many cases, yes. The mortgage interest tax deduction is a favorite among homeowners because so much of mortgage payments go toward interest—especially in the first years of the loan.

The IRS documents rules for mortgage interest tax deductions in Publication 936: Home Mortgage Interest Deduction. Generally, you can deduct the entire interest portion of your mortgage payment if you itemize your deductions on Schedule A (Form 1040).

To be deductible, the interest you pay must be on a loan secured by your main home or a second home, regardless of how the loan is labeled. The loan can be a first or second mortgage, a home improvement loan, a home equity loan, or a refinanced mortgage.

However, there are mortgage deduction limits to be aware of:

• Loans taken out after December 15, 2017: Limit of $750,000 ($375,000 for married couples filing separately)

• Loans taken out on or before December 15, 2017: $1 million ($500,000 for married couples filing separately)

• Loan proceeds not used to buy, build, or substantially improve your home; not eligible unless the loan was taken out before October 13, 1987: see IRS Pub. 936

• Loans that exceed the fair market value of the home: see  IRS Pub. 936

What other home expenses are deductible?

Homeowner tax benefits go beyond traditional interest payments. Here are a few benefits you may want to take advantage of:

• Mortgage Insurance: Qualified mortgage insurance includes those required through Department of Veterans Affairs (VA) loans, Federal Housing Administration (FHA) loans, and private mortgage insurance (PMI).

• Points: The mortgage points tax deduction includes loan origination fees and discount points. Because they are prepaid interest, these items are deducted over the life of the loan and not all in the year you paid them.

• Real Estate Taxes: The deduction for state and local taxes, including real estate taxes, is limited to $10,000 ($5,000 for married couples filing separately).

As a homeowner, it is important to take the time to understand your tax benefits and options so you are better prepared to make filing decisions that save you as much money as possible. Remember, the home you have purchased is an investment in your financial future, but it is up to you to do the research so you are better able to confidently file your taxes and reap the tax benefits that are only available to homeowners.