The IRS Limit on Deducting Your Mortgage Interest

Buyers ask whether the mortgage interest deduction still changes the math on a bigger loan, and the rules aren’t what they were a decade ago. So I went back to IRS Publication 936 and read it through. I’m a realtor, so check any of this with whoever does your taxes.

The ceiling, and the older ceiling

Publication 936 is the IRS guide to the home mortgage interest deduction, and its Part I conditions come first: you file Form 1040 or 1040-SR and itemize deductions on Schedule A, and the mortgage is a secured debt on a qualified home in which you have an ownership interest. The edition available now is for use in preparing 2025 returns. Its reminders say you can deduct home mortgage interest on the first $750,000 of indebtedness, or $375,000 if you’re married filing separately. That ceiling had been written to expire after the 2025 tax year, and Congress took the expiration out, so it still governs the return you file next spring. Higher limitations, $1,000,000 and $500,000 filing separately, apply if you’re deducting interest from indebtedness incurred before December 16, 2017. There’s also grandfathered debt: a mortgage taken out before October 14, 1987, and secured by the home since then, isn’t limited at all, though the publication says the amount of grandfathered debt reduces the limit available for home acquisition debt.

What counts as a qualified home

The debt has to be secured by a qualified home, meaning your main home or your second home. The publication defines a home as a house, condominium, cooperative, mobile home, house trailer, boat or similar property that has sleeping, cooking and toilet facilities. You can have only one main home at a time, and it’s the one where you ordinarily live most of the time. A second home you don’t hold out for rent or resale at any time during the year can be treated as a qualified home even if you never use it that year.

Renting the second home out

If you rent the second home out part of the year, the publication says you also have to use it as a home during the year for it to be a qualified home: more than 14 days, or more than 10 percent of the number of days it’s rented at a fair rental, whichever is longer. Fall short and it’s rental property, covered by a different publication.

A house under construction

You can treat a home under construction as a qualified home for up to 24 months, but only if it becomes your qualified home at the time it’s ready for occupancy. The publication says the period can start any time on or after the day construction begins.

The home equity carve-out

Interest on a loan secured by your home isn’t deductible to the extent the proceeds weren’t used to buy, build or substantially improve that home, and the publication is explicit that this holds no matter when the debt was incurred.

Reading Form 1098

If you paid $600 or more of mortgage interest on any one mortgage during the year, you’ll generally get a Form 1098 or a similar statement from the mortgage holder, and it should reach you by January 31 of the following year. A copy goes to the IRS. The statement shows the total interest you paid, any mortgage insurance premiums, and, if you bought a principal residence that year, the points paid, including seller-paid points, that are deductible to the extent you don’t exceed the home acquisition debt limit. The publication is careful about points. The form may report points you can’t deduct, particularly if you’re filing separately or carrying mortgages on several properties, and certain points it leaves off may still be deductible, either in the year paid or over the life of the loan.

Shopping with the cap in mind

The cap runs on the loan balance, so the down payment you bring changes whether you’re under it. If you’re weighing two ways to structure a purchase in Greater Boston this fall, run both past your accountant before you sign anything, and send me the addresses you want to see. I’m Diana Kim, REALTOR with eXp Realty, working with buyers and sellers in English and Korean.