The federal government promotes home ownership through a variety of income tax write-offs for your mortgage payments. But, they're available only if you itemize your deductions. At the end of the calendar year, you'll receive a Form 1098 from your lender showing the various costs you paid so that you -- and the Internal Revenue Service -- can better track your deductions.
Mortgage Interest Deduction
You're allowed to deduct only the interest portion of your mortgage payments -- the principal portion isn't deductible. The IRS caps the maximum amount of mortgage interest you can deduct each year as the interest you pay on the first $1.1 million of mortgage debt. This limit applies cumulatively to both your primary residence and your second home. For example, say you have a $900,000 mortgage on your main home and a $300,000 mortgage on your vacation home. You're permitted to deduct the interest only on the first $1.1 million of debt -- the interest on the last $100,000 isn't deductible.
When you take out a mortgage, you're also permitted to deduct the cost of the points you pay. According to IRS Publication 936, "points" refer to costs you pay to obtain your mortgage and are sometimes called "loan origination fees, maximum loan charges, loan discount, or discount points." If the points meet certain requirements, you can deduct the points in the year you take out the mortgage. These requirements include: The mortgage is for your main home; the points aren't charged for items that are usually separate like appraisal, inspection, attorney and title fees or property taxes; the points are calculated based on a percentage of the mortgage amount; and the points are shown separately on your settlement statement. Alternatively, you can deduct the points over the life of the mortgage. For example, if you pay points on a 15-year mortgage for a second home, you can deduct 1/15th of the points each year.
Second Home Rules
The IRS allows you to deduct the interest paid on not only your main residence, but also one second home. If you don't rent out the second home, you can count it even if you don't use it at all during the year for yourself. But, if you rent it out at all, you must use the home for the longer of 14 days or 10 percent of the time you rent it out for it to qualify. For example, if you rent out the home for a week during the summer, you must use it for personal use for at least 14 days during the year for it to qualify as a second home to deduct mortgage interest.
Bundled Costs in Mortgage Payments
Your mortgage payment often also includes a portion for mortgage insurance and real estate taxes, according to IRS Publication 530. These costs are also potentially deductible on your taxes. Mortgage insurance premiums can be deducted if your income doesn't exceed the limits for your filing status. However, you can deduct only the portion of these payments that are actually used to pay real estate taxes during the calendar year. For example, if you pay money into an escrow account for real estate taxes in December 2015, but the bank pays the taxes in January 2016, you must claim the deduction on your 2016 return.
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