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Can I Claim Mortgage Interest On Taxes

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Tax Tip: Claiming Mortgage Interest On Your Tax Return

Can I Deduct Mortgage Interest? I Mark Kohler

Mortgages can be considered money loans that are specific to property. If they are incurred for the purpose of earning income by renting property to tenants, the interest portion of the mortgage is deductible on line 8710 of the T776 Rental Income form. Only the interest portion of the mortgage is deductible, and the interest is only deductible in the original term of the loan. If a lump sum amount was paid to reduce the interest rate on a mortgage, only a pro-rated portion of that lump sum is deductible in the tax year it was paid.

Note that if you are renting out part of your principal residence, you are only eligible to claim a portion of the mortgage interest.

How Much Mortgage Interest Is Tax Deductible

The official line of the Canadian government is that you can deduct the interest you pay on any money you borrow to buy or improve a rental property. If you rent out your property for the entire year, then the total amount of interest on your mortgage is tax deductible. If you only rent it out for a portion of the year, then only that period of interest payments is tax deductible.

It ultimately depends on both the proportion of the space rented out, and the length of time said space is generating rental income. Heres a table to help break it down for you:

Size of space, time rented Amount of mortgage interest thats tax deductible
Whole property, whole year 100%
Whole property, part of the year 100% of the interest payments for the time the property was rented out
Part of the property , whole year % total square footage x 12 months. (e.g. a 500 sqft. Basement suite rented for one year in a 1500 sqft home = total property space, and therefore total yearly mortgage interest is tax deductible.
Part of the property , part of the year % total square footage x time rented. E.g. 500 sqft basement in a 1500 sqft home, rented for 2 months, = total interest payment for only those 2 months of the year is tax deductible.

In a situation where you are not using your residential property space to generate rental income, check out our post, What is The Smith Maneuver, to learn more about how much of your mortgage interest could be tax-deductible.

What Counts As Rental Income

The first step in reducing your rental income for tax purposes is understanding exactly what rental income is. The Internal Revenue Service defines it as any payments you receive in exchange for the occupation of a property that you own.

This includes monthly lease payments as well as security deposits that you donât return to the tenant. Perhaps your lease allows you to deduct the cost of certain repairs from the security deposit if a tenant damages the property. The amount you keep from the security deposit becomes rental income in the year you deduct it from the deposit.

The same applies if the security deposit represents the first or last monthâs rent. This is reportable income. By the same token, if you accept a security deposit and it sits untouched in a trust account during the entirety of the rental term, this isnât income, nor is any interest the deposit generates. The interest belongs to the tenant.

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Do All Mortgages Qualify For This Tax Deduction

The home mortgage interest tax deduction comes with several qualifying rules.

This includes interest you paid on loans to buy a home, home equity lines of credit , and even construction loans. But the TCJA placed a significant restriction on home equity debt beginning with the 2018 tax year. You can’t claim the deduction for this type of loan unless you can prove that it was taken out to “buy, build, or substantially improve” the property that secures the loan. You cant claim the tax deduction if you refinance to pay for a college education or wedding, either.

The tax deduction is also limited to interest you paid on your main home or a second home. Interest paid on third or fourth homes isn’t deductible. The home can be a single-family dwelling, condo, mobile home, cooperative, or even a boatpretty much any property that has “sleeping, cooking, and toilet facilities,” according to the IRS.

What Counts As Mortgage Interest

How Much Mortgage Interest Can You Claim On Taxes

Deductible mortgage interest is interest you pay on a loan, secured by a main home or second home, that was used to buy, build, or substantially improve the home. For tax years prior to 2018, the maximum amount of debt eligible for the deduction was $1 million. Beginning in 2018, the maximum amount of debt is limited to $750,000. Mortgages that existed as of December 15, 2017 will continue to receive the same tax treatment as under the old rules. Additionally, for tax years prior to 2018, the interest paid on up to $100,000 of home equity debt was also deductible raising the previous total to $1,100,000. Loans with deductible interest typically include:

  • A mortgage to buy or build your home
  • A second mortgage
  • A line of credit
  • A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn’t deductible. Your home mortgage must be secured by your main home or a second home. You can’t deduct interest on a mortgage for a third home, a fourth home, etc.

Also Check: How Much Do You Pay Back On A Mortgage

Get Your 1098 From Your Lender Or Mortgage Servicer

To fill out the information about the interest you paid for the tax year, youll need a 1098 Form from your mortgage lender or mortgage servicer, the entity you make your payments to. This document details how much you paid in mortgage interest and points during the past year. Its the proof youll need for your mortgage interest deduction.

Your lender or mortgage servicer will provide the form for you at the beginning of the year, before your taxes are due. If you dont receive it by mid-February, have questions not covered in our 1098 FAQ or need help reading your form, contact your lender.

Keep in mind, you will only get a 1098 Form if you paid more than $600 in mortgage interest. If you paid less than $600 in mortgage interest, you can still deduct it.

How Much Mortgage Interest Can You Deduct On Your Taxes

Everyone wants to save on taxes, and one of the best ways is to maximize every possible deduction.

The mortgage interest deduction used to be a mainstay for consumers, but the past few years have changed that. Some homeowners may be better off not claiming that deduction.

If you do want to claim it, read below to figure out how it works – and if it makes sense for you.

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Can You Claim First Time Home Buyer On Taxes

Although homebuyers can no longer claim the federal first-time homebuyer credit, you’ll likely find similar programs locally. … Many first-time homebuyer programs offer tax benefits in the form of mortgage credit certificates , which convert some of the mortgage interest you pay into a federal tax credit.

A Portion Of The Property Is Used For Business Exclusively

Mortgage Interest Tax Deduction

If you own a property, whether it be your principal residence or not, where part of the space is used to operate a business and part of the space is for personal use, you can deduct only a portion of the mortgage interest paid. Say, for example, an accountant has a home-based practice. He converted one of the homes bedrooms into an office, and it is used for business purposes only . The area of the office is 10% of the homes total area, so he can then deduct 10% of his annual mortgage interest payments as a business-use-of-home expense.

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What Kind Of Debt Qualifies For The Mortgage Interest Tax Deduction

There are two types of debt that qualify for this big tax break: acquisition debt and equity debt.

Acquisition Debt

Any secured loan you get to buy, build or remodel a main or second home.

It includes refinanced debt up to the amount of your old mortgage balance just before doing the refinance.

The total amount of interest you can deduct for acquisition debt is limited to one million dollars for your main and second home .

Equity Debt

Any loan secured by your main or second home that you took out for a reason other than to buy, build, or remodel.

It could be money you spent to start a business, pay for education, or to take a vacation, for instance.

It has a much lower limit than acquisition debt for claiming the interest deduction: $100,000 .

What If You Use Your House To Run A Small Business

If you work from home or use your home to run a small business, you can deduct certain costs associated with your work space. This may even include house related expenses, such as electricity, but you still cant deduct the interest on your mortgage.

For instance, if that homeowner sets up a home office, complete with a computer, fax machine, and printer, because of the extra wattage that office creates, their electricity bill is going to get more expensive. They also might need office supplies, maybe even pay some other employees to help them with their workload. They can then contact the Canada Revenue Agency, and find out if their home qualifies as a business, and which expenses if any, they can claim. If it does qualify, they can declare their such things as supplies, property taxes , and other related costs on their taxes, and would be entitled to a deduction relating to how much they spent during that tax year.

for more information about borrowing using your home equity.

Want to know how much it costs to buy a house in your city? Check out this infographic.

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Should The Mortgage Interest Tax Deduction Affect Your Home Buying Decision

Buying a home requires a series of financial decisions.

Youll have to choose a home and find the right loan type, but youll also decide how much money to put down and whether to lower your interest rate with mortgage points.

The decisions continue after closing on the loan: Should you pay off the mortgage quickly by making higher monthly payments, or invest your extra money elsewhere? Should you get a new loan to tap home equity, or find another way to finance repairs and projects?

All these decisions could impact a homeowners ability to save money through the mortgage interest tax deduction.

For example, making a larger down payment reduces your loan balance, which lowers interest payments that can be deducted.

Likewise, buying mortgage points at closing lowers the interest rate of the new loan, which also reduces tax-deductible interest paid to the lender.

And, of course, paying off a mortgage entirely eliminates interest payments altogether, which could bump some taxpayers into a higher tax bracket.

So, should you maintain higher mortgage payments for the purpose of lowering your taxable income through the mortgage interest deduction?

Only you and your tax professional can answer this question, because the answer depends on your unique situation and your broader financial life.

If Someone Else Received The 1098 Can I Still Claim Real Estate Taxes And The Mortgage Interest Since My Name Is On The Mortgage

Can I Claim The Mortgage Interest Deduction?

You can not double up the mortgage interest deduction on two returns. Meaning if the total mortgage interest paid in 2013 was $5,000 you can not claim $5,000 and your boyfriend claim the same $5,000 otherwise between the two of you you would be claiming $10,000 combined which would be more than what you actually paid. However, you can split the interest between the two of you subject to rules below, meaning the splitting must make sense). If you “actually” paid for the expenses then you can claim what you paid. However, if your bf took the then he would have to amend back out what you are now attempting to claim.

Requirements to take the Deduction: If you are attempting to take a mortgage interest deduction then you must either be liable for the actual mortgage payment itself or have an ownership interest in the home. Merely paying the mortgage note is not enough to confer rights to take the deduction.

IRS.Gov Helpful link to deductions

IRS Publication 555 – Community Property

IRS Publication 936 Home Mortgage Interest

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The Property Is A Primary Residence

For mortgage interest on a primary residence, however, it gets a bit more complicated. Generally, mortgage interest for primary residences is not considered tax-deductible in Canada even where part of your house is used to run a small business. However, using a strategy like the Smith Maneuver, you could effectively make interest on a residential mortgage.

Tax Season Is Here How Does Your Mortgage Fit In

We have good news and bad news. The good news is that you dont have to file anything for your mortgage on your income taxes. The bad news is that most of us do not get to claim mortgages/mortgage interest as a deduction. While our neighbours down south get to claim interest on their mortgages as tax deductions, the Canadian tax system does not allow it. There are exceptions, however, so continue reading to learn more.

I Run A Business Out Of My Home Can I Claim Mortgage Interest?

If you operate a business out of your home, you can deduct some work-related expenses. This might include hydro, telephone, and internet, but you still cant deduct mortgage interest. In the event your home business becomes big enough, you can contact the Canada Revenue Agency to find out if your home qualifies as a business. If it does qualify, you might be allowed to claim expenses like supplies, property taxes, and condominium fees.

My Home Produces Rental Income Can I Claim Mortgage Interest?

Yes, if your property produces rental income, its considered an investment property. If, say, you rent out more than one of your rooms in your home and earn income from a tenant or tenants, your expenses will likely be considered rental-related and possibly be claimable on your taxes. In cases where your property does not receive income from business or rent, you cannot claim any mortgage interest tax.

Is It A Good Idea To Make My Mortgage Interest Tax Deductible?

Collin Bruce

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What Kind Of Loans Get The Deduction

If all your mortgages fit one or more of the following categories, you can generally deduct all of the interest you paid during the year.

  • Mortgages you took out on your main home and/or a second home on or before October 13, 1987 .
  • Mortgages you took out after October 13, 1987 to buy, build or improve your main home and/or second home that totaled $1 million or less for tax years prior to 2018 or $750,000 or less for tax years beginning with 2018. Mortgages that existed as of December 15, 2017 will continue to receive the same tax treatment as under the old rules.
  • Home equity debt you took out after October 13, 1987 on your main home and/or second home that totaled $100,000 or less throughout the year for tax years prior to 2018. Interest on such home equity debt was generally deductible regardless of how you use the loan proceeds, including to pay college tuition, credit card debt, or other personal purposes. This assumes the combined balances of acquisition debt and home equity do not exceed the home’s fair market value at the time you take out the home equity debt. Beginning in 2018, the interest on home equity debt is no longer deductible unless it was use to buy, build, or substantially improve your home.

If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct and for more details on the rules summarized above, see IRS Publication 936: Home Mortgage Interest Deduction.

Choose A Standard Deduction Or An Itemized Deduction

Deducting Mortgage Interest and Property Tax – TurboTax Tax Tip Video

If you choose the standard deduction, you will not need to complete more forms and provide proof for all of your deductions. Its more of the no questions asked deduction, with a flat dollar amount thats the same for most people. For the 2021 tax year, which will be the relevant year for April 2022 tax payments, the standard deduction is:

  • $12,550 for single filing status
  • $25,100 for married, filing jointly
  • $12,550 for married, filing separately
  • $18,800 for heads of households

If you choose an itemized deduction, you can pick and choose from various deductions. These include mortgage interest, student loan interest, charitable contributions, medical expenses and more. To itemize your deductions, youll need to fill out additional forms to list each one and provide records, receipts and other documents that validate them.

Both standard and itemized deductions reduce your taxable income.

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How To Deduct Mortgage Interest On State Tax Returns

If your state charges income tax, you may be able to deduct your mortgage interest on your state tax returns. However, how much you can deduct and any other limits depends on your specific state’s rules.

If you want to deduct the interest, you can use the figures from the 1098 form sent by your mortgage company. If you don’t receive a 1098 form, that may mean that you paid less than $600 in interest. However, you should still be able to deduct the mortgage interest. You will just have to manually calculate the amount of interest paid in total.

Some states may have a limit on how many properties you can deduct the mortgage interest for, while others states will let you deduct the interest on all your homes.

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