Advantages and Disadvantages of Mortgage Interest Deduction

You must use Form 1040 to claim mortgage interest.

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The mortgage interest deduction allows you to claim a tax deduction for qualifying interest paid during the year. Though the mortgage interest deduction offers a number of advantages that makes owning a home more affordable, it does have a few drawbacks that taxpayers should be aware of when planning for the future.

High Limits

The biggest advantage to the mortgage interest deduction is that you can reduce your income by the amount of interest paid on the first $1 million -- or $500,000 if you're married filing separately -- of home acquisition debt you pay each year. This means that if your mortgage is $1 million or smaller, you can deduct all of the interest you pay each year. In addition, you can also deduct the interest on up to $100,000 -- or $50,000 if you're married filing separately -- on home equity debt, which is debt borrowed against the value of the home that you didn't use to buy the home.

Second Home Mortgages

Not only can you deduct the mortgage on your main home, but, within the mortgage debt limits, you can also deduct the interest on a qualifying second home. If you have a second home that you don't rent out, it qualifies even if you don't use it. If you do rent it out, you have to use it for the longer of 14 days or 10 percent of the time you rent it for it to qualify.

Declining Deduction

The mortgage interest deduction is generally a declining deduction, because as you pay down your mortgage, less and less of each payment does to interest. As a result, your mortgage interest will decline in future years so you can't time the deduction to coincide with years in which you pay a higher tax rate. On the bright side, by the time your interest payments decline significantly, you may have enough other income that you would itemize anyway because of higher state and local income taxes or charitable donation deductions.

Must Itemize

You must itemize your deductions to claim the mortgage interest deduction. When you itemize, you replace your standard deduction with the sum of your itemized deductions, including the mortgage interest deduction. As a result, if your itemize deductions don't exceed your standard deduction, the mortgage interest deduction is worthless to you for the year and you can't carry it over to a future year.