Although taxpayers may deduct certain payments related to home mortgages on their tax return, the specific amount of their deduction may be limited. In general, deductions are available on any mortgage for a first or second home.
Types of Mortgage Deductions
Taxpayers cannot deduct the cost of their mortgage per se, but can deduct the amount of interest they pay on their mortgage each year. Additionally, they may deduct the amounts of any origination points and the insurance premiums they paid.
Fully Deductible Interest Payments
There are three types of mortgages for which the entire amount of interest is deductible. These types are not exclusive, meaning that a taxpayer can aggregate multiple deductions to which they are entitled on their return. The broad categories of deductible interest are:
- Mortgages acquired prior to October 13, 1987: These mortgages are often referred to as "grandfathered mortgages" because they were grandfathered into the current tax deduction caps.
- Mortgages acquired after October 13, 1987: Used to buy, build or improve the home used as security for the loan. These mortgages are often referred to as "acquisition debt mortgages."
- Mortgages acquired after October 13, 1987: Used for any reason other than improving, buying or building the home used as security for the loan. These mortgages are often referred to as "equity debt mortgages."
Acquisition and equity debt mortgages have different maximum limits and other rules. For grandfathered mortgages, the entire amount of interest payment is deductible, regardless of its balance or what the loan money was used for.
Acquisition Debt Mortgage Deductions
The deduction for interest payments on an acquisition debt mortgage is limited by the home's value as of December 31st of the previous year. For married taxpayers filing jointly, the maximum home value is one million dollars; for single taxpayers, the limit is $500,000. Taxpayers of a first or second home with a value lower than these limits may deduct the entire amount of their interest payments.
Exceptions to the general rule exist for refinanced debt or a mortgage acquired after the date of the home's purchase. Examples of a mortgage acquired after the date of the home's purchase include a taxpayer who builds his own home, moves into it and subsequently takes out a mortgage on the property.
Generally, interest payments on refinanced debt are only deductible up to the amount of the balance of the old mortgage. This prevents taxpayers from doubling their interest payment deduction. Similarly, a mortgage acquired after the purchase or possession of a home is only deductible up the value of the home or, if the taxpayer built the home, the amount of their expenditures to build the home in the two years prior to its completion.
Equity Debt Mortgage Deductions
Deductible amounts for equity debt mortgage interest payments are limited to the smaller of 1) $100,000 for married taxpayers filing jointly or $50,000 for single taxpayers and 2) the total of a home's fair market value after reduced by the amount of acquisition and grandfather debt, if any. For example, a home with a fair market value of $200,000 with an acquisition debt of $50,000 is valued, for these purposes, at $150,000. A married taxpayer filing jointly would be limited to claiming $100,000 of a deduction because it is less than the fair market value of the home accounting for the acquisition debt.
Any amounts above the maximum limits ($100,000 and $50,000) are treated as personal interest and, as such, are not deductible. If, however, the taxpayer used the additional funds for a deductible purpose, such as a business investment, they may deduct the remaining interest payment under that option.
Mortgage Point Deductions
Taxpayers can deduct the cost of any points they paid to acquire their loan. The entire amount of a point is deductible, but must be separated over the life of the loan. Only the portion of the point paid within the year is deductible.
Mortgage Insurance Premium Payments
Taxpayers can deduct the amount of insurance premiums they paid over the year. However, to claim any part of this deduction, married taxpayers filing jointly may not earn more than $109,000 and single taxpayers no more than $54,500 per year. The deductible amount for insurance premiums begins phasing out at an adjusted gross income (AGI) of $100,000 for married taxpayers filing jointly and $50,000 for single taxpayers.
Changes with the Fiscal Cliff Deal
Mortgage deductions were addressed with the American Taxpayer Relief Act of 2012.
The mortgage interest deduction is still in place. However, higher incomes will see some limits on their ability to obtain these deductions moving into 2013. There is a new phase-out of this deduction for singles with incomes over $250,000 and married couples with income over $300,000. For these filers, itemized deductions will be reduced by the lesser of 3% of the AGI over $300,000 or by 80% of the itemized deductions that would be otherwise allowed for that year. These particular changes will not affect your 2012 taxes.
The new law had a more straightforward effect on the mortgage insurance premium deduction. The mortgage insurance premium payment deduction had expired on December 31, 2011; however, with the passage of the new law, this deduction was extended through the end of 2013. Taxpayers can deduct these premiums for tax years 2012 and 2013.
Claiming Your Available Mortgage Deductions
To claim a deduction for home mortgage interest, point payments or insurance premiums, you must itemize your deductions on Schedule A of Form 1040. Publication 936 contains additional information about the types and amounts of mortgage deductions that are commonly available. Seek advice from a tax professional if you are unsure whether you qualify for a deduction.