Mortgage Interest as An Itemized Deduction
You can deduct on your schedule A as an itemized deduction the mortgage interest related to the mortgage for your primary and secondary residence.
The amount that you can deduct depends on the date you took out the mortgage, the amount of your mortgage balance, and how you used the mortgage proceeds. In addition, you must secure your loan by your primary or secondary residence.
You can only use as an itemized deduction the interest on acquisition debt. Acquisition debt refers to funds that you used to:
- or make significant improvements to your primary or secondary residence.
If you took out the mortgage between October 13, 1987 and December 15, 2017:
- the IRS caps the total acquisition debt for a primary residence and a second home at $1 million,
- $500,000 if you are married filing separately.
If you took out the mortgage between December 16, 2017 and December 31, 2025:
- the IRS caps the acquisition debt at $750,000,
- $375,000 if you are married filing separately.
The IRS does not allow you to deduct the mortgage interest that is allocated to acquisition debt exceeding these limits.
To calculate your total acquisition debt for the year, there are a couple of methods. The most you might benefit from is the one using the average balances during the year. You can calculate the average balances using 3 methods:
- average of first and last balance method,
- interest paid divided by interest rate method,
- and the method using the statements provided by your lender.
Each method has its specific requirements that you can see in Publication 936.
If you have a combined average balance of all your mortgages below the limits mentioned above, you can deduct in full your mortgage interest. Otherwise, you should use table 1 from IRS Publication 936, Home Mortgage Interest Deduction.
It is important to make sure that you choose the correct method in calculating your acquisition debt for the year. As an example, you can see in the “McNamara v. Commissioner of Internal Revenue” court case how the IRS disallowed a portion of the mortgage interest deduction on the taxpayers’ 2019 joint personal return due to incorrect calculation of the average mortgage balance.
The taxpayers had the house only for 5 months in 2019, but they calculated the average mortgage balance using a 12 months period. The mortgage interest is deductible only if the home secures the outstanding balance of the loan. Since the taxpayers’ loan secured the home only for 5 months, from January 1st up to May 2019, when the taxpayers sold their home, the taxpayers should have used a 5 months period in determining their average mortgage balance.
To avoid any IRS issues, you should always check what your tax preparation software does.
This material is for informational purposes only. It does not constitute tax, legal or accounting advice.