When Home Mortgage Interest Is Not Tax Deductible
The home mortgage deduction is one of the most popular in the entire U.S. tax code. It enables you to deduct, within limits, the interest you pay on a mortgage or mortgages you take out to buy, build, or improve your main home (and/or a second home).
You Don't Itemize Your Deductions
The home mortgage deduction is a personal itemized deduction that you take on IRS Schedule A of your Form 1040. If you don't itemize, you get no deduction. You should itemize only if your total itemized deductions exceed the applicable standard deduction for the year. Most people who own homes itemize because their interest payments, property taxes, and other itemized deductions exceed the standard deduction. However, this isn't always the case.
You Don't Own the Property
You’re not allowed to claim the mortgage interest deduction for someone else’s debt. You must have an ownership interest in the home to deduct interest on a home loan. This means that your name has to be on the deed or you have a written agreement with the deed holder(s) that establishes you have an ownership interest. For example, a parent who buys a home for a child that is in the child's name alone cannot deduct mortgage interest paid on the child's behalf.
You Don't Live In the Home
You can deduct the interest on a home mortgage only for:
- your main home -- that is, the home where you ordinarily live most of the time, and
- a home that you choose to treat as your second home.
If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this second home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.
Your Mortgage Is Too Large
Home mortgage interest for a loan or loans totaling $1 million is deductible as an itemized deduction. Interest on a home equity loan on a main or second home of up to $100,000 is also deductible. Thus, you can deduct the interest on a total of $1.1 million in home loans each year. If you borrow more than that, the additional interest is not deductible.
You're Married and File Your Taxes Separately
The tax law says that the home mortgage interest deduction must be cut in half in the case of a married person filing an individual return--in other words, a married person filing separately can deduct the interest on a maximum of $600,000. The obvious purpose of the 50% reduction is to prevent married home owners who file separately from each claiming a deduction on $1.1 million of mortgage debt, for a total of $2.2 million.
If each spouse's name is on the mortgage and they each pay half the interest, they'll each get 50% of the mortgage interest deduction on their separate return. In this event, there may not be much difference in their total tax liability than if they had filed jointly.
However, if only one spouse's name is on the mortgage, the 50% reduction can be brutal. Faina Bronstein found this out the hard way. In 2007, she and her father-in-law purchased a home in Brooklyn together for $1,300,000. They jointly took out a $1 million mortgage. Faina lived in the home full-time with her husband and she paid the entire $50,000 interest on the mortgage herself.
Faina and her husband filed their 2007 taxes separately. On her separate return, she claimed the full $50,000 interest deduction for the home. Her husband took no mortgage interest deduction at all on his separate return.
Faina may not have followed the exact letter of the law, but she and her husband did not try to take a double mortgage interest deduction. Faina deducted no more than she could have if she and her husband had filed jointly.
Unfortunately, the IRS and Tax Court didn't see things Faina's way. They ruled that the tax law had to be read literally and the 50% reduction applied in her case. As a result, she was limited to deducting interest on $500,000 of her mortgage debt. Her husband got no deduction at all because his name wasn't on the mortgage and he didn't pay any of the interest.
Had Faina stayed unmarried, she could have deducted her $50,000 interest on the whole $1 million mortgage. The 50% reduction in the mortgage interest deduction applies only to married people who choose to file separately, not singles who must file that way.
More Information on Deducting Home Mortgage Interest
For more on the subject, see the Nolo article Deducting Mortgage and Other Interest. Also, IRS Publication 936, Home Mortgage Interest Deduction, provides extensive information on this topic.