Overview of Mortgage Interest Tax Deductions

While the topic of mortgage interest tax deductions is one that I have covered in previous posts, I would like to offer a fresh overview in light of some updates that I recently stumbled across. Besides, given all the noxious rumors of the deduction’s imminent elimination, this post will at least serve to remind borrowers that it’s still in the tax code and should be taken full advantage of.

By the end of February, borrowers should have received a copy of IRS Form 1098 from their lenders, which outlines the amount of mortgage interest (provided it exceeded $ 600) paid in 2010. Only mortgage interest that was paid on a secured (by a deed of trust that has been officially recorded) mortgage is eligible for the deduction. You should double check the document for errors, since it will be compared with your tax returns by the IRS.

Basically, you are allowed to deduct the mortgage interest on up to $ 1,000,000 in acquisition debt and $ 100,000 in home equity debt. To qualify for the deduction, acquisition debt must be used for acquisition, construction, or renovation. That means your acquisition debt will decline over time (as you repay the loan), as will only increase if you obtain a cash-out refinancing and use some of the proceeds to improve the value of your home.

No such limitations apply to home equity debt. In addition, debt not obtained through a home equity loan (i.e. HELOC) in order to qualify as home equity debt. In practice, that means that up to $ 1.1 million in acquisition debt is tax deductible, as long as $ 100,000 is listed as home equity debt. Generally speaking, that also means that you can deduct up to $ 100,000 in increased debt associated with a cash-out refinancing.

Mortgage insurance premiums paid in 2010 are also tax deductible in their entirety, as long as the property was purchased after January 1, 2007. However, the law that sanctioned this deduction is scheduled to expire at the end of 2011, having already been extended once in 2010. The only limitation is that those who earned more than $ 100,000 are eligible for only a partial deduction, while those that earned more than $ 110,000 will be completely ineligible for the deduction.

In the end, IRS rules governing tax deductions seem to change slightly from year to year, and you’re advised to speak to a tax consultant (and/or buy the latest edition of tax software) to determine the optimal way to obtain the deduction. Also, if you are in the process of buying a home (and obtaining a mortgage), you can use our Real Estate Tax Benefits Calculator to estimate the savings associated with deducting your mortgage interest.