The New Mortgage Interest Deduction 2021

There were some big changes to the Tax Code in 2017 that affected Mortgage Interest Deduction. Learn how to use this deduction to save you money!

What is the Mortgage Interest Deduction?

The Mortgage interest tax deduction is one of the tax benefits of owning real estate. It is an itemized deduction homeowners can use on their first and/or second home with mortgage(s) to lower your taxable income which means saving money on taxes.

For Mortgage Interest Deduction Purposes a home can be a house, a second home, condo, co-op, mobile home, time share (Subject to use requirement) or even a boat! The key is that it is where you live.

For the interest to qualify, the loan must be used to buy, build, or substantially improve your home. Home Equity Lines of Credit may sometimes qualify depending on how the funds are used.

IRS publication 936 “home mortgage interest deduction” is a great technical resource on this topic.

Standard Deduction or Itemized?

Since the Standard Deduction was beefed up in 2017 to 12K for a single person and 24K for a married couple, and the interest rates are at all-time lows under 3%, I would say if you are making less than 100K a year the standard deduction will probably be better. If you think you can add up itemizations that are larger than the maximium standard deduction of 24K then itemized will be the way to go!

How to Calculate Mortgage Interest Deduction

If you paid interest of $600 or more in a year your lender is supposed to send you a 1098B form sometime in January to help you file your taxes. In this document, the lender tells you how much interest you paid. If you didn’t get one of these here is how you calculate the mortgage interest you paid yourself:

Loan Amount x Interest Rate = Interest Paid

Let’s look at a simple example: you purchased a $1,000,000 home with 25% down- the interest rate on the loan was 3%. 

$750,000 Loan Amount x .03 Interest Rate = $22,500 Interest Paid

Mortgage Interest Deduction limit

Trump’s Tax Cuts and Jobs Act of 2017 lowered the Mortgage interest deduction limit from $1,000,000 to $750,000. The current tax law is scheduled to sunset in 2026.

If you have a mortgage or mortgages that exceed 750K you can only use interest paid up to the limit. Let’s look at an example: suppose you have $1,250,000 mortgage at an interest rate of 5%.

You calculate the interest paid the same as before:

$1,250,000 Loan Amount (Exceeds $750,000 Limit) x .05 interest rate = $62,500 Interest Paid

But there is a second step now because you cannot deduct all of that interest. You take the total mortgage and divide it by the limit to give you the ratio of interest paid you are allowed to deduct

Loan Amount / $750,000 = Deductible Interest Paid Ratio

$1,250,000 / $750,000 = 0.6

That means you can take 60% of the interest you paid.

Putting it all together:

$62,500 Interest Paid x 60% Deductible Interest Paid Ratio = $37,500 Mortgage Interest Deduction.

What IRS Form for Mortgage Interest Deduction? 

You put the mortgage interest deduction amount on Schedule A of your 1040 Tax Return.  

Mortgage Interest Deduction FAQ

I have two mortgages, can I use the deduction for both?

Yes, you can use more than one mortgage for the mortgage interest deduction. There is no limit on the number of mortgages only on the loan amount that they total no more than $750,000. If you have 2 loans with different interest rates, you may choose the loan with the higher rate. For any loan to qualify it must have been used to purchase, build or substantially improve the home. HELOCs may or may not qualify depending on the use of the funds.

I have two homes, can I use the deduction for both?

Yes, you can use the mortgage interest deduction on up to 2 homes. According to the IRS, the second home must be used 14 to 30 days a year- it can be rented for the rest of the time or be left empty. For Mortgage Interest Deduction purposes you can only use up to two homes, so if you have three or more homes you may use up to two for the mortgage interest deduction.

What about Mortgage insurance (PMI)?

Yes, you can deduct PMI also. 


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