One common tax myth is the belief that all mortgage interest is deductible. This misconception can lead to incorrect assumptions about tax benefits and potential issues with the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Historical Assumptions: In the past, mortgage interest deductions were less restrictive, leading to a lingering belief that all mortgage interest is fully deductible.

• Lack of Awareness: There is often confusion about the specific rules and limits for deducting mortgage interest.

Reality of Deducting Mortgage Interest

• Loan Amount Limits: The IRS limits the amount of mortgage interest you can deduct based on the loan amount.

• $750,000 Limit: For mortgages taken out after December 15, 2017, interest on up to $750,000 of mortgage debt is deductible ($375,000 if married filing separately).

• $1 Million Limit: For mortgages taken out on or before December 15, 2017, interest on up to $1 million of mortgage debt is deductible ($500,000 if married filing separately).

• Qualified Residences: The mortgage must be secured by a qualified residence, which includes your primary home and one secondary home.

• Usage of Loan: The mortgage must be used to buy, build, or substantially improve the qualified residence. Interest on home equity loans used for other purposes (e.g., paying off credit card debt) is not deductible.

IRS Guidelines on Mortgage Interest Deductions

• Form 1098: Lenders issue Form 1098, Mortgage Interest Statement, which reports the amount of interest you paid during the year.

• Schedule A: You must itemize your deductions on Schedule A (Form 1040) to claim the mortgage interest deduction.

• Home Equity Loans: Interest on home equity loans is deductible only if the loan is used to buy, build, or improve your home and the total debt is within the limits mentioned above.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that all mortgage-related interest payments are deductible, regardless of loan amounts or purposes.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand the Rules: Clearly understand the IRS rules for deducting mortgage interest.

• Deduction Limits: Be aware of the $750,000 and $1 million mortgage debt limits.

• Qualified Use: Ensure the loan is used for buying, building, or improving your home.

What You Can Deduct

• Qualified Mortgage Interest: Document mortgage interest paid on loans within the specified limits and used for qualified purposes.

• Home Equity Loan Interest: Track and report interest on home equity loans used for buying, building, or improving your home, ensuring it falls within the IRS limits.

What You Need to Do

• Keep Detailed Records: Maintain accurate records of mortgage interest payments, including Form 1098 and loan documentation.

• Itemize Deductions: Ensure you itemize your deductions on Schedule A (Form 1040) to claim the mortgage interest deduction.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional can ensure you correctly identify and claim eligible mortgage interest deductions.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of deducting mortgage interest.