7.4 Mortgage Interest Deduction

The home mortgage interest deduction is one of the most valuable tax benefits for homeowners who itemize. The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes effective 2018-2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the TCJA mortgage-interest rules PERMANENT rather than letting them sunset back to the pre-TCJA $1,000,000 limit.

Itemized Deduction Requirement

Mortgage interest is only deductible if the taxpayer itemizes on Schedule A. With the 2025 standard deduction at $15,750 (Single) / $31,500 (MFJ)—and even higher with the new Senior Bonus—many homeowners still find itemizing does not produce a benefit. The expanded SALT cap (up to $40,000) does, however, push more high-tax-state homeowners back into itemizing.

Acquisition Indebtedness Limits — Now Permanent

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.

OBBBA Update: Before OBBBA, the $750,000 cap was scheduled to expire after 2025, with the $1M limit returning in 2026. OBBBA struck the sunset—the $750,000 cap is now permanent unless changed by future legislation.

Combined Debt Calculation

When a taxpayer has both grandfathered debt (pre-12/16/2017) and newer 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 is $750,000 or more, NO new debt qualifies

Example: Maria has a $600,000 mortgage from 2015 (grandfathered). In 2025, she takes out a $300,000 loan on 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
• Allocate interest proportionally (50% deductible on the new loan)

Qualified Residence Definition

A qualified residence includes:

1. Main home (principal residence)
2. One second home (you elect which property each year)

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
• A boat or RV with sleeping, cooking, and toilet facilities can qualify

Pre-TCJA vs. Post-OBBBA Comparison

Home Equity Loan Interest — Now Permanent

This is a major rule that OBBBA made permanent. It is heavily tested on the EA exam.

Pre-TCJA Rule: Interest on up to $100,000 of home equity debt was deductible regardless of how proceeds were used.

Post-TCJA / Post-OBBBA Rule (permanent): Home equity interest is ONLY deductible if proceeds 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: Keep records showing how proceeds were used. The IRS may require proof that funds went to qualifying home improvements.

Points (Loan Origination Fees)

Points are prepaid interest charged by lenders at closing. Each point equals 1% of the loan amount. 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 ÷ 360 months = $10
• Annual deduction: $10 × 12 = $120/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. If refinancing with the same lender, you must add the old unamortized points to the new points and amortize the combined total over the new term.

Mortgage Insurance Premiums (PMI/MIP)

Tax Year 2025 Status: Mortgage insurance premiums are NOT deductible for personal residences.

Key Point for EA Exam: For the 2025 tax year (tested July 2026 – February 2027), PMI is NOT deductible on Schedule A for personal residences. OBBBA did not include a PMI restoration. Form 1098 Box 5 may still show PMI paid, but the amount is not deductible.

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

Form 1098: Mortgage Interest Statement

Lenders issue Form 1098 to report mortgage interest and related items.

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 use the $750,000 limit (now permanent under OBBBA).
2. MFS halves the limit: $375,000 for post-12/15/2017 loans.
3. Home equity trap: Interest is ONLY deductible if the loan is used to buy/build/improve the residence. OBBBA made this permanent.
4. Points timing: Purchase = deduct now; Refinance = amortize. Know the early-payoff exception.
5. PMI for 2025: NOT deductible for personal residences (OBBBA did not restore).
6. Two-home limit: Only main home plus ONE second home qualify.
7. Itemizing required: None of these deductions matter if the taxpayer takes the standard deduction.
8. OBBBA permanence: Don't expect the $1M limit to return in 2026—it was made permanent at $750K.