Owning your home offers a number of perks, including allowing you to invest in your own piece of real estate rather than renting out someone else’s. However, one of the biggest advantages of home ownership is your ability to deduct mortgage interest, according to tax audit defense firm TaxAudit. However, you must meet certain requirements to do this, so let’s take a look at them.
For starters, let’s examine what mortgage interest is in the first place. This type of interest refers to any interest you pay on your mortgage loan. Note that the government will allow you to deduct the interest you’ve paid on your home’s mortgage only if that home is a primary residence or one other residence — for example, a vacation property. If you end up owning three homes, you must choose which two will benefit from mortgage interest deductions.
Also, you can deduct interest on any money that you borrowed and used to substantially improve, purchase, or build either of the two properties. This borrowed money is your home loan also called acquisition debt. However, if the loan was originated before Dec. 16, 2017, you can deduct interest on no more than a million dollars. Meanwhile, if the loan was originated on Dec. 16, 2017, or later, you can deduct interest on no more than $750,000. If your acquisition debt for your two properties exceeds these limits, then you are allowed to deduct just a portion of the interest you have paid.
Finally, if you received a mortgage loan but decided to use these funds for something other than majorly improving, buying, or building a home, then you cannot deduct any interest you have paid on this debt between now and the tax year of 2025. That’s because this type of debt is considered equity debt, and according to the current law, only acquisition debt — not equity debt — can be deducted.