IRS Rules on Mortgage Interest Deduction

If you’re mulling the possibility of buying a home -- or a second home -- you're probably aware that the Internal Revenue Service offers an enticing deduction for homeowners: the home mortgage interest deduction. While many homeowners qualify to claim the deduction, not every loan’s interest can be written off. Familiarize yourself with the IRS’s rules on the mortgage interest deduction so you don’t inadvertently rack up a tax penalty.

Type and Limits for Debt

To qualify to claim the home interest deduction, your interest must be charged on a home that’s financed with a mortgage secured by the home -- where the home serves as collateral for the loan itself. Most mortgages meet this requirement. You may also only claim interest on $500,000 in home loans, or $1 million if you’re married and file jointly.

Qualifying Homes

To qualify for the deduction, the interest must accrue on a home that you live in at least part of the time during the year. The deduction doesn’t apply to commercial properties or rental residential units. You may only claim the deduction on two residences, but the IRS allows you to select the two you wish to use for the deduction each year. The $500,000 or $1 million limit applies to the total value of both homes.

Renting Your Home

While the deduction doesn’t apply to rental properties, you may still claim the deduction if you rent your second home when you’re not using it in some situations. To qualify as a residence and not a rental home, you must use the second home for personal use at least 14 days or more than 10 percent of the number of days you rent it each year, whichever is longer. Additionally, if you rent a room or a portion of your home, you may continue to claim the interest deduction if the portion of your home is used for residential use and it isn’t a self-contained portion of your home.

Form 1098

When you pay $600 or more in a year in mortgage interest, the IRS requires your lender to mail a Form 1098 by Jan. 31 of the following year. This form lists the deductible expenses for your loan, including the amount of interest you paid through the course of the year and any deductible points you purchased, if any. When claiming the deduction, you must include a copy of your Form 1098 along with Schedule A, which lists your itemized deductions.