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 Dear James,

Well, it's a new year and you know what that means... tax season is upon us. Since we've all been working hard through 2020 to get people into homes while rates were so low, I thought now would be a good time to cover this topic.  It's written for the benefit of these new owners (or maybe even people who've been in homes awhile and are looking at deductions for the first time) and those thinking about buying a home soon, so they can assess the information before filing returns.  While it is written so it speaks directly to them, I think the information is valuable for anyone who isn't up to speed on deductions.  Please pass along as needed.

What is the mortgage interest deduction?

Buying a home is a proven method of wealth-building; you’ll build equity as you pay off your loan and the home grows in value.But there’s another financial benefit for prospective homebuyers. Come tax time each year, you might qualify for the mortgage interest deduction.  

Always consult a tax professional before filing, but for some homeowners, the mortgage interest tax deduction can reduce their taxable income by thousands of dollars. However, tax law changes over the past few years have led to a decrease in the number of Americans who claim the mortgage interest deduction.

Whether you’re a current or aspiring homeowner, here’s what you should know.

Who qualifies for the mortgage interest deduction?

The Tax Cuts and Jobs Act of 2017 changed the rules for the mortgage interest deduction.

Since 2017, if you take the standard deduction, you cannot deduct mortgage interest.  

For the 2020 tax year, the standard deduction is $24,800 for married couples filing jointly and $12,400 for single people or married people filing separately.

But if you use itemized deductions instead of claiming the standard deduction, you can deduct the interest you pay each tax year on mortgage debt. This includes any mortgage loan used to buy, build, or improve your home.

You may also be able to deduct interest on a home equity loan or line of credit (HELOC), as long as the loan was used for one of those three purposes.

Mortgage interest deduction limits

The amount of mortgage interest you can deduct depends on the type of home loan you have and the way you file your taxes.

• If you are single or married and filing jointly, and you’re itemizing your tax deductions, you can deduct the interest on mortgage debt up to $750,000
• If you are married and filing separately from your spouse, you can deduct interest payments on mortgage debt up to $375,000 each tax year 

For mortgages taken out prior to 2018, the rules are a bit different.

• For any home loan taken out on or before October 13, 1987, all mortgage interest is fully deductible
• For home loan taken out after October 13, 1987, and before December 16, 2017, homeowners can deduct interest on mortgage debt up to $1 million (or $500,000 if married and filing separately)
• The $1 million limit also applies to homeowners who entered a binding purchase agreement between December 16, 2017, and January 1, 2018 

You can deduct interest payments on home equity loans and lines of credit, too, as long as the debts were used to pay for home improvements or to purchase or build your home.

If you have a home equity loan or line of credit and the funds were NOT used to buy, build, or substantially improve your home, then the interest cannot be deducted.

Other requirements to claim your deduction

Along with staying within the IRS’s limits, to qualify for the mortgage interest tax deduction your home must:

• Be listed as ‘collateral’ to secure the loan — Interest on a personal loan or credit card used for home improvements won’t go toward the tax deduction, because this debt isn’t secured by the property like home equity debt
• Have basic accommodations — The home must have plumbing and other basic living requirements to qualify for the deduction
• Be a part-time residence — Owners of second homes who also rent out their homes must live in the second home at least 14 days (or as much as 10% of the days the home is rented out if that number exceeds 14 days) to claim the deduction on Schedule A. Otherwise the interest must be reported on Schedule E as an investment property 

How the mortgage interest tax deduction helps homeowners

Writing off home acquisition debt tends to help homeowners with higher incomes. That’s because high-earning homeowners typically have larger mortgage balances and are more likely to buy a second home or vacation property– both of which increase tax-deductible mortgage interest payments.

This means their home mortgage interest is more likely to exceed the federal income tax’s new, higher standard deduction of $24,800 for couples filing jointly or $12,400 for individual tax filers.

Real estate agents and home builders still tout this tax deduction as an incentive to buy a home. They like to claim that it increases the homeownership rate and helps people transform from renters to homeowners.

However, thanks to the new standard deductions created by the 2017 Tax Act, a larger share of homeowners will not itemize their taxes and thus won’t be able to deduct mortgage interest.

What other costs are tax-deductible?

Mortgage interest isn’t the only cost of homeownership that’s tax-deductible. If you choose to take itemized deductions, you could also deduct:

• Mortgage points — Homebuyers often pay cash upfront to lower their mortgage rate for the life of the loan. For example, paying an extra 1% of the loan amount can lower the interest rate by 0.25%. Cash paid for mortgage points can qualify for the interest deduction
• Prepayment penalties — Most new mortgages don’t charge prepayment penalties, but older loans may still require them. If so, you could write off the prepayment penalty as part of your mortgage interest tax deduction
• Late payment fees — Even late payment fees qualify for the mortgage interest tax deduction
  PMI — Congress has extended the rule allowing homeowners to deduct mortgage insurance payments. This applies to loans with private mortgage insurance (PMI) as well as government-subsidized mortgage insurance on FHA, VA, and USDA loans 

Property taxes are also tax-deductible, but they are not included in the mortgage interest deduction. They are written off elsewhere on the 1040 Schedule A tax form.

So, what does tax law exclude from the home mortgage interest deduction?

• Homeowners insurance premiums — Homeowners insurance premiums are not tax-deductible. However, you may be able to write off this expense if you have a home office and deduct those expenses on Schedule C
• Other home buying costs — Title searches, earnest money, moving expenses — none of these costs qualify for this tax deduction
• Reverse mortgage interest — Since interest on these loans comes due when the property sells, they aren’t tax-deductible 

Should you claim the mortgage interest deduction?

Remember, you can take the mortgage tax deduction only if you itemize your taxes. And that’s only worth doing for taxpayers whose write-offs exceed the standard deduction.

For example, say you and your spouse own a home with a $315,000 mortgage loan. Your itemized deductions might look something like this:

• Mortgage interest: $9,500
• Property taxes: $3,000
• Charitable donations: $2,000 

Your total itemized deductions come out to $14,500. In this case, as a couple filing jointly, you’d want to take the $24,800 standard deduction because it far exceeds your itemized deductions.

But if you were a single homeowner with the same itemized deductions — or a married one filing separately — you’d want to itemize. That’s because the sum of your itemized deductions is greater than the standard deduction of $12,400.

Consult a professional tax advisor

As with any major decision, consult a professional when deciding how to file taxes. A licensed tax advisor can review your situation and let you know how to deduct mortgage interest – or if you should at all.

How to claim the home mortgage interest deduction
To claim the mortgage interest deduction, a taxpayer should use Schedule A which is part of the standard IRS 1040 tax form.

Your mortgage lender should send you an IRS 1098 tax form which reports the amount of interest you paid during the tax year. Your loan servicer should also provide this tax form online.

Using your 1098 tax form, find the amount of interest paid and enter this on Line 8 of Schedule A on your tax return. Seems pretty simple, right?

Claiming the deduction gets more complicated if you earn income from the property. If you own rental properties or a vacation home you rent out most of the year, for example, you’ll need to use Schedule E.

If you’re self-employed and write off business expenses, you’ll need to enter interest payments on Schedule C.

Is the deduction for me?

With such low rates, mortgage payments are more affordable than ever. Homebuyers have not needed tax incentives to encourage buying or refinancing. But if you do decide to use it, the mortgage interest deduction is a nice perk, and yet another way homeownership can bolster your personal finances. Again, please consult your tax advisor before making a decision.

Of course, every situation is going to be different. If you or your clients have any questions about these deductions, please reach out to me anytime.  Adding value and keeping our clients informed is at the top of my daily goals list. With the boom in newer homeowners we've seen in the last months who may not know what to do after they've bought the home, I will continue to try to stay on top of things so we can all have an advantage and offer our existing clients beneficial information and keep them for life by adding value past the closing. This is the way to keep clients for life. Please call me anytime.  I'm always happy to help.

Please stay healthy everyone. Please call me if you have any questions at all. These are unprecedented times are I am always happy to be an additional resource to help navigate through it.
If you're currently working with a Noble Loan Officer, contact them today for more information on any of our programs.  Otherwise, I am always available to discuss loan programs, co-branding, and other ways to add value to your business anytime. 

My Best Regards, 

  Brad Malkin, President
 Noble Home Loans  NMLS # 100539
(c) 702.279.9111  (o) 702.932.7503

(e) brad.malkin@noblehomeloans.com