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Owning a home is associated with some big tax breaks. Homeowners can reduce their taxable income by the amount of yearly interest they paid on their mortgage. Although you can deduct the interest for the year, you can't deduct the principal. There is no need to enter the principal you paid on your tax return.
Homeowners can deduct interest paid on the loans for their primary and secondary homes. If you have a rental property, you must occupy it for more than 14 days out of the year or 10 percent of the time it is rented. The loan can be a mortgage, second mortgage, line of credit or home equity loan secured by the home.
If the loan or line of credit is secured with any other collateral, it is considered a personal loan and ineligible for the deduction. You can't claim the interest paid on more than two properties. The deduction isn't limited to houses and condominiums. The IRS defines a qualifying home as a property that has sleeping, cooking and toilet facilities, including a mobile home, recreational vehicle or boat.
To deduct the mortgage interest, you must be personally liable for the debt. You can only deduct interest you actually paid. For example, if you paid your child's mortgage for a year, you can't claim the interest unless your name is on the mortgage. Your child can't claim the deduction if you do. However, if you give your child money she uses to pay the mortgage, she would have the right to claim the interest. If there are two names on the mortgage, the deduction can be divided between the two borrowers.
If you got the mortgage before Oct. 14, 1987, all of the interest is deductible, regardless of the amount you borrowed. For mortgages after that date, you can only deduct the interest that accrues on the first $1 million of the mortgage. If you are married and file an individual tax return, the limit drops to the interest accrued on the first $500,000. The limits are cumulative for primary and secondary homes.
Your lender will issue an IRA Form 1098 mortgage interest statement showing the amount of interest you paid during the year. You must itemize your deductions to claim the interest deduction. You will need to use Form 1040 to file your taxes and report the itemized expenses on Schedule A. Your interest payments are combined along with any other itemized deductions you are entitled to claim on Schedule A. The total amount of your itemized deductions reduces your taxable income.