Since 1913, American homeowners have been able to claim a mortgage interest deduction from their federal income taxes. There are limitations however; interest paid on first & second mortgages, lines of credit secured by real estate, and home equity lines of credit valued up to $1,000,000.00 or $500,000.00, if married and filing separately, is able to be deducted. After those limits are reached the remaining interest is not deductible.
What do I need to do it claim the deduction?
First, fill out IRS Schedule A to determine whether your itemized deductions, including your mortgage interest, exceed your standard deduction. If they do, you’ll need to file the 1040 long form. Second, you’ll need Form 1098, your Mortgage Interest Statement, from your mortgage lender. This details the amount of interest and mortgage-related expenses you paid during the tax year you are filing for. Third, if you bought the property in the year for which you are filing, you’ll need the HUD-1 Settlement Statement form from your lender. This itemizes the fees you paid when you closed your loan.
If you prepare your own taxes, check out IRS Publication 936, the Home Mortgage Interest Deduction, and the instructions for filing Schedule A. If you use an accountant, he or she may simply need Form 1098 and the HUD form, but double check whether any additional documents are necessary.
Who qualifies for the deduction?
In order to qualify you must be legally liable for the loan. In other words, you’re not able to deduct mortgage payments you’ve made for someone else unless you’re legally liable to make the payments. Also, a qualified home, i.e. your primary or second home, must secure the mortgage. And, be sure to double-check that the mortgage interest deduction you claim on Schedule A and the amount on Form 1098 are the same.
Additionally, keep your 1098 Form and any worksheets you use to figure the amount of your deduction along with a copy of your return for as long as is legally necessary. If you need additional information, check the IRS for their guidelines.
Editor’s note: This post was originally published in January 2011. It has been updated with the latest information and edited for cohesiveness.