Mortgage Interest Deduction

The home mortgage interest deduction is one of the most valuable tax benefits for homeowners who itemize deductions. However, the Tax Cuts and Jobs Act (TCJA) made significant changes effective for 2018-2025 that every EA candidate must understand. This section covers acquisition indebtedness limits, qualified residences, home equity loans, points, mortgage insurance premiums, and Form 1098 reporting requirements.

Itemized Deduction Requirement

Critical Point: Mortgage interest is only deductible if the taxpayer itemizes deductions on Schedule A. With the 2024 standard deduction at $14,600 (Single) and $29,200 (MFJ), many taxpayers now find itemizing does not provide a benefit - meaning they get no tax advantage from their mortgage interest.

Acquisition Indebtedness Limits

The amount of mortgage interest you can deduct depends on when the mortgage originated:

Acquisition indebtedness is debt incurred to buy, build, or substantially improve a qualified residence. The residence must secure the loan.

Combined Debt Calculation

When a taxpayer has both grandfathered debt (pre-December 16, 2017) and new debt:

1. The grandfathered debt uses the $1 million limit first
2. The remaining capacity under $750,000 is reduced by the grandfathered amount
3. If grandfathered debt equals or exceeds $750,000, NO new debt qualifies

Example: Maria has a $600,000 mortgage from 2015 (grandfathered). In 2024, she takes out a $300,000 loan for a second home.

• Grandfathered debt: $600,000 (within $1M limit - fully deductible)
• New debt capacity: $750,000 - $600,000 = $150,000
• Only $150,000 of the new $300,000 loan qualifies
• She must allocate interest proportionally (50% deductible)

Qualified Residence Definition

A qualified residence includes:

1. Main home (principal residence): Where you ordinarily live most of the year
2. One second home: You choose which property if you own more than one

Important Limits:

• Maximum of TWO qualified residences (main + one second)
• Second home must be used personally - if rented out, you must use it for the greater of 14 days or 10% of rental days to qualify
• A boat or RV can qualify as a second home if it has sleeping, cooking, and toilet facilities

Pre-TCJA vs. Post-TCJA Comparison

Home Equity Loan Interest (TCJA Change)

This is a major TCJA change that appears frequently on the EA exam.

Pre-TCJA Rule: Interest on up to $100,000 of home equity debt was deductible regardless of how the proceeds were used (pay off credit cards, buy a car, vacation, etc.).

TCJA Rule (2018-2025): Home equity loan interest is ONLY deductible if the loan proceeds are used to buy, build, or substantially improve the qualified residence that secures the loan.

Deductible Uses (interest IS deductible):

• Adding a room or bathroom
• Installing a new roof
• Renovating the kitchen
• Building a deck or garage

Non-Deductible Uses (interest is NOT deductible):

• Paying off credit card debt
• Buying a car
• Paying for college tuition
• Taking a vacation
• Paying medical bills

Documentation Tip: Taxpayers should keep records showing how home equity loan proceeds were used. The IRS may require proof that funds were used for qualifying home improvements.

Points (Loan Origination Fees)

Points are prepaid interest charged by lenders at closing. Each point equals 1% of the loan amount. The deduction rules differ for purchase vs. refinance:

Refinance Calculation Example: A taxpayer pays $3,600 in points on a 30-year refinance.

• Monthly deduction: $3,600 divided by 360 months = $10
• Annual deduction: $10 times 12 = $120 per year

Early Payoff or Refinance Exception: If the loan is paid off early or refinanced with a DIFFERENT lender, the remaining unamortized points can be deducted in full in that year. However, if you refinance with the SAME lender, you must add the old unamortized points to the new points and amortize the combined total over the new loan term.

Mortgage Insurance Premiums (PMI/MIP)

Tax Year 2024 Status: Mortgage insurance premiums are NOT deductible for personal residences.

Key Point for EA Exam: For the 2024 tax year (tested May 2025 - February 2026), PMI is NOT deductible for personal residences. This is a frequently tested topic because many taxpayers incorrectly assume PMI is still deductible.

Exception for Rental Properties: PMI on rental property mortgages is deductible as a rental expense on Schedule E, Line 9 (Insurance).

Form 1098: Mortgage Interest Statement

Lenders issue Form 1098 to report mortgage interest and related items. Understanding what appears in each box is essential:

Reporting Threshold: Lenders must issue Form 1098 if they received $600 or more in mortgage interest during the year.

Multiple Borrowers: Form 1098 is issued only to the payer of record (typically the first borrower listed).

EA Exam Tips

1. Know the dates: December 15, 2017 is the cutoff. Loans after this date use the $750,000 limit.

2. MFS halves the limit: Married Filing Separately taxpayers get only half the debt limit ($375,000 for post-TCJA loans).

3. Home equity trap: Interest on home equity loans is ONLY deductible if used to buy, build, or improve the home. This is heavily tested.

4. Points timing: Purchase = deduct now; Refinance = amortize. Know the exception for early payoff.

5. PMI for 2024: NOT deductible for personal residences. Do not be tricked by Form 1098, Box 5 showing an amount.

6. Two-home limit: Only main home plus ONE second home qualify. A taxpayer with three homes must choose which second home to designate.

7. Itemizing required: None of these deductions matter if the taxpayer takes the standard deduction.