Important Things to Know About Home Mortgage Interest Deduction

Home mortgage interest is a tax-deductible expense that is reported on Form 1040, Schedule A beside other deductions on tax, such as real estate property tax, medical expenses and charitable contributions. These are itemized deductions.Schedule A must be filled out by the taxpayers in order to see whether their itemized deductions exceed their standard deductions or not.

Mortgage Loan Agreement

If yes, then more money could be saved by itemizing, and for that particular purpose of deductions, Taxpayers need to file a Long Form 1040.

Documents Required

The main documents that you’ll need are: Form 1098 (Mortgage Interest Statement from your lenders), and HUD-1 settlement statement from the related company, in case you bought or sold any home.

The IRS Forms and publications that you’ll need are: Publication 936 (Home Mortgage Interest deduction), Instructions for Schedule A, Schedule A and a Worksheet to calculate the limitation on mortgage interest.

Mortgage Interest Deductions

The Mortgage Interest includes interest paid on loans to buy a home, home equity lines of credit, and construction loans. The amount that can be deducted is limited, which means only the interest paid on your main home and a second home can be deducted. The interest on third and fourth home does not qualify as deductible.

In order to deduct your mortgage interest, you need to meet all of the following requirements:

  • File Form 1040, and itemize the deductions on Schedule A.
  • One must be legally liable for the loan. If not, then you cannot even deduct payments that you make for someone else. Lender and you both must have a debtor- creditor relationship and must also intend to repay the loan.
  • The mortgage should be a secured debt on a qualified home such as, main home and second home.

Secured Debt on Home

The mortgage loan needs to be secured by your home in order to make the interest, tax deductible. For this you need:

  • Your ownership in a qualified home security for the payment of debt,
  • Be recorded under any state or local law that applies at that time,
  • To ensure that in-case of default, your home could satisfy the debt.

Qualified Home

Home Mortgage Interest Deduction

As discussed above, the mortgage must be secured by a qualified home in order to make the interest deductible. A qualified home comprises of your main home and second home. You’ll need an experienced tax professional to help you figure out the most favorable amount of mortgage interest to deduct if you have more than two residences.

According to IRS Publication 936, the word “home” means any property that has sleeping, cooking and toilet facilities available. It includes a house, a condominium, cooperative, mobile home, house trailer, boat or any other similar property.

Keeping a Record

You should get a Form 1098, Mortgage Interest Statement from each mortgage lender, which reports the total amount of interest paid by you during the tax year. You don’t need to attach these documents to your returns as the financial institutions themselves send a copy directly to IRS.

The amount that you claim for mortgage interest deduction on Schedule A must match the reported amount on Form 1098. The amount deducted can be less than the amount paid as per the limitations of the mortgage interest deduction.

You must keep Form 1098 and the worksheets used, to make out your deductions with the copy of tax returns for at least 3 years from the date you filed your return.

 

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