The 2022 Mortgage Interest Deduction: Your Guide To Limits And Qualifications

There isn’t much about taxes that gets people excited, except when it comes to the topic of deductions. Tax deductions are certain expenses you incur throughout the tax year that you can subtract from your taxable income, thus lowering the amount of money you pay taxes on.

And for homeowners who have a mortgage, there are additional deductions they can include. The mortgage interest deduction is one of several homeowner tax deductions provided by the Internal Revenue Service (IRS). Read on to learn more about what it is and how to claim it on your taxes this year.

The mortgage interest deduction is a tax incentive for homeowners. This itemized deduction allows homeowners to subtract mortgage interest from their taxable income, lowering the amount of taxes they owe. This deduction can also be taken on loans for second homes as long as it stays within IRS limits.

Signed in 2017, the Tax Cuts and Jobs Act (TCJA) changed individual income tax by lowering the mortgage deduction limit and putting a limit on how much you can subtract from your taxable income.

Before the TCJA, the mortgage interest deduction limit was on loans up to $1 million. Now the loan limit is $750,000. That means for the 2022 tax year, married couples filing jointly, single filers and heads of households could deduct the interest on mortgages up to $750,000. Married taxpayers filing separately could deduct up to $375,000 each.

However, there were a few exceptions:

• Any mortgage taken out before October 13, 1987, is considered grandfathered debt and is not limited. All of the interest you pay is fully deductible.
• Any home purchased after October 13, 1987, and before December 16, 2017, is still eligible for the $1 million limit ($500,000 each, if married filing separately).
• Any home that was sold before April 1, 2018, is eligible for the $1 million limit – only if there was a binding contract entered before December 15, 2017, to close before January 1, 2018, and the home was purchased before April 1, 2018.

There are a many types of home loans that qualify for the mortgage interest tax deduction. These include a home loan to buy, build or improve your home. Home equity loans, home equity lines of credit and second mortgage may also qualify.

You can also use the mortgage interest deduction after refinancing your home. Just make sure the loan meets the previously listed qualifications (buy, build or improve) and that the home in question is used to secure the loan.

Tax forms can help walk you through your filing step by step. Knowing which forms to fill out can be confusing. To make sure you are getting and filing the right form, follow these steps for deducting your mortgage interest on your 2022 taxes.

1. Choose A Standard Deduction Or An Itemized Deduction

If you choose the standard deduction, you will not need to complete more forms and provide proof for all of your deductions. It’s more of the “no questions asked” deduction, with a flat dollar amount that’s the same for most people. For the 2022 tax year, which will be the relevant year for April 2023 tax payments, the standard deduction is:

• $12,950 for single filing status
• $25,900 for married, filing jointly
• $12,950 for married, filing separately
• $19,400 for heads of households

If you choose an itemized deduction, you can pick and choose from various deductions. These include mortgage interest, student loan interest, charitable contributions, medical expenses and more. To itemize your deductions, you’ll need to fill out additional forms to list each one and be prepared to provide records, receipts and other documents that validate them.

Both standard and itemized deductions reduce your taxable income.

Mortgage Interest Deduction Example

So how do you decide which one to do? It all comes down to which method saves you more money. If your standard deduction saves you more money than your itemized deduction, take the standard deduction. Or vice versa.

Here’s an example. You itemize the following deductions as a single individual: mortgage interest ($6,000), student loan interest ($1,000) and charitable donations ($1,200). These deductions add up to $8,200. In this case, you would want to take the standard deduction of $12,950 instead because an additional $4,750 would be deducted from your taxable income.

Now let’s say your mortgage interest is $11,000 and the other deductions remain the same. Your itemized deductions would total $13,200. In this case, you would want to take the itemized deduction because it reduces your taxable income by $250 more than the standard deduction would.

Don’t forget: If you’re paying someone to prepare your taxes for you, it may cost more to have them itemize your taxes since this requires more work. Make sure you factor in the extra cost when deciding which method saves you the most money.

One of the most important things to know about taking either the itemized or standard deduction is that you can’t take both. You must choose one or the other.

2. Get Your 1098 From Your Lender Or Mortgage Servicer

To fill out the information about the interest you paid for the tax year, you’ll need a Form 1098 from your mortgage lender or mortgage servicer (the company you make your payments to). This document details how much you paid in mortgage interest and points during the past year. It’s the proof you’ll need for your mortgage interest deduction.

Your lender or mortgage servicer will provide the form for you at the beginning of the year your taxes are due. If you don’t receive it by mid-February, or have questions not covered in our 1098 guide and need help reading your form, contact your lender.

Keep in mind, you will only get a 1098 Form if you paid more than $600 in mortgage interest. If you paid less than $600 in mortgage interest, you can still deduct it.

3. Choose The Correct Tax Forms

You’ll need to itemize your deductions to claim the mortgage interest deduction. Since mortgage interest is an itemized deduction, you’ll use Schedule A (Form 1040), which is an itemized tax form, in addition to the standard 1040 form.

This form also lists other deductions, including medical and dental expenses, taxes you paid and donations to charity. You can find the mortgage interest deduction part on line 8 of the form. You’ll put in the mortgage interest information found on your 1098 in that section. Pretty easy.

Now comes the tricky part. If you make money from the home – whether using it as a rental property or using it for your business – you’ll need to fill out a different form. That’s because the way interest is deducted from your taxes depends on how you used the loan money, not on the loan itself.

You may need to use the following forms depending on your situation:

• If you are deducting the interest you pay on rental properties, you must use Schedule E (Form 1040) to report it. This form is used for supplemental income from rental real estate.
• If you use part of your house as a home office or if you use money from your mortgage for business purposes, you may need to fill out a Schedule C (Form 1040 or 1040-SR) to report it. This form is used for profit or loss from a business you owned or operated yourself.

You’ll list mortgage interest as an expense on either of these forms. Whatever mortgage interest you’re deducting and whatever form you’re using, it’s important to know what qualifies as interest and what isn’t deductible. If you’re itemizing your deductions, read on.

There are a few payments you make that may count as mortgage interest. Here are several you may consider deducting.

Interest On The Mortgage For Your Main Home

This property can be a house, co-op, apartment, condo, mobile home, houseboat or similar property. However, the property will not qualify if it doesn’t have basic living accommodations, including sleeping, cooking and bathroom facilities. The property must also be listed as collateral for the loan you’re deducting interest payments from. You can also use this deduction if you got a mortgage to buy out an ex’s half of the property in a divorce.

You can still deduct mortgage interest if you receive a non-taxable housing allowance from the military or through a ministry – or if you have received assistance under a State Housing Finance Agency Hardest Hit Fund, an Emergency Homeowners’ Loan Program or other assistance programs. However, you can only deduct the interest you pay. You can’t use any interest that another entity pays for you.

Interest On The Mortgage For A Second Home

You can use this tax deduction on a mortgage for a home that is not your primary residence as long as the second home is listed as collateral for that mortgage. If you rent out your second home, there is another caveat. You must live in the home for more than 14 days or more than 10% of the days you rent it out – whichever is longer. If you have more than one second home, you can only deduct the interest for one.

Mortgage Points You Have Paid

When you take out a mortgage, you may have the option to buy mortgage points, which is a form of prepaid interest. Each point, which costs 1% of your mortgage amount, can get you about 0.25% off your mortgage rate. Mortgage points are paid at closing and must be paid directly to the lender to qualify you for the deduction.

In certain instances, points can be deducted in the year they are paid. Otherwise, you have to deduct them ratably over the life of the loan. If you have questions, you should consult a tax professional.

Late Payment Charges On Your Mortgage

As long as the charge wasn’t for a specific service, you can deduct late payment charges as home mortgage interest. However, just because you can deduct this, you should still never make late payments on your mortgage; doing so can result in damage to your credit score, along with other penalties.

Prepayment Penalties

Some lenders will charge you if you pay off your mortgage early. If you have to pay a prepayment penalty, you can deduct that as mortgage interest. However, the penalty must be from paying the loan off early and can’t be from a service or additional cost incurred from the loan. Rocket Mortgage^® doesn’t charge prepayment penalties.

Interest On A Home Equity Loan

A home equity loan is money borrowed from the equity you have in the home. You can receive it in a lump sum or as a line of credit. For the interest you pay on a home equity loan to qualify, the money from the loan has to be used to buy, build or “substantially improve” your home. If the money is used for other purposes, such as buying a car or paying down credit card debt, the interest isn’t deductible.

Interest Paid Before Selling Your Home

If you sell your home, you can still deduct any interest you paid before the home was sold. So, if you sold the home in June, you can deduct the interest you paid from January through May or June, depending on when you made your last mortgage payment on the home.

Mortgage interest isn’t the only expense you’ll incur when you purchase and own a home. Many people believe these other expenses are tax-deductible, but they aren’t. Here’s a list of some of the most common expenses that are mistaken for being tax-deductible:

• Homeowners insurance: Your homeowners insurance premiums won’t qualify.
• Mortgage insurance premiums: Mortgage insurance premiums, VA funding fees and USDA guarantee fees are no longer considered deductible mortgage interest.
• Other closing costs: Title fees, legal costs, recording fees, title insurance, agent commissions, home inspection expenses and credit check fees can’t be used.
• Moving expenses: Unless you’re an active-duty service member, your moving expenses also can’t be deducted from your taxes.
• Deposits, down payments or earnest money: If you forfeited any of these during the home buying process, you can’t claim them.
• Interest accrued on a reverse mortgage: Since you don’t pay interest until the loan comes due, you can’t get a deduction on something you aren’t paying yet.
• Rent: Any payments made while living in the home before the purchase was finalized can’t be used on your taxes since it’s considered rent.

Remember, the mortgage loan’s interest can only be deductible if the home you purchased with the loan is used as collateral. For example, if you own a rental property and borrow against it to purchase a home, the interest doesn’t qualify because the home isn’t being used as collateral (the rental property is instead).

Special Circumstances

No two situations are alike, so naturally, there’ll be odd circumstances regarding the mortgage interest deduction. Here are a few examples:

• If you’re a co-op apartment owner, you can deduct your share of the interest you pay on the building’s total mortgage.
• If you rented out part of your home, you could treat the rented portion as part of your living space. You can do this as long as the rented portion is used as living space, it doesn’t have separate sleeping, cooking and toilet facilities, and you don’t rent to more than two people who have separate sleeping spaces.
• If the home was a timeshare, you can treat it as a home or second home and deduct mortgage interest as long as it meets the standard requirements.
• If the house is under construction, it can still qualify for up to 24 months as long as it becomes your qualified home after construction is complete.
• If you used part of mortgage proceeds to pay debt, invest in a business or for something else unrelated to buying a house.
• If your house was destroyed, it might still qualify for the mortgage interest deduction, but you must rebuild the home and move back in or sell the land within a reasonable period of time.
• If you were divorced or separated and you or your ex paid the mortgage on a home you both own, you or your ex can deduct half of the total payments you made. The other person must include the other half as alimony.

For even more special circumstances, check out Pub. 936 from the IRS.

Is all mortgage interest deductible?

Not all mortgage interest can be subtracted from your taxable income. Only the interest you pay on your primary residence or second home can be deducted if the loans were used to purchase, build or improve your property, or used for a business-related investment. If the interest doesn’t meet those requirements, then it doesn’t qualify.

Why is some mortgage interest not tax deductible?

As mentioned above, the deductibility of mortgage interest is also dependent on whether your loan is secured by the value of the mortgaged property being used as collateral. If the loan is unsecured, like a personal loan, the interest typically cannot be deducted. What’s more, if you’re looking to have the interest on a home equity loan or HELOC deducted but have used it for purposes other than purchasing or improving your home, like paying off credit card debt, you will likely be unable to do so.

What other tax deductions are there for homeowners?

In addition to the mortgage interest deductions discussed above, some homeowners might be eligible for deductions on their property taxes, state income taxes or capital gains taxes.

If you aren’t able to qualify for any tax deductions, tax credits might be another avenue to look into. A mortgage interest credit, for example, allows qualified homeowners to claim a credit on their tax return that’s worth a percentage of the mortgage interest they paid over the course of a given tax year.

Can you deduct mortgage interest after refinancing your home?

If you refinanced your primary or secondary residence, you might still be able to use the mortgage interest deduction. Mortgage interest can be deducted as long as the money from the refinance was used to increase the value of the home.