It’s tax season, which means it’s time to figure out your deductions. If you’re a homeowner, you need to know about the mortgage interest deduction and how it can save you some cash on your taxes.
What Is The Mortgage Interest Deduction?
Home mortgage interest refers to interest paid on a loan secured by either your primary home or your second home. The loan may be in the form of a mortgage to buy your home, a line of credit, a second mortgage, or a home equity loan. If you are legally eligible to receive this loan, you can deduct that interest on your taxes in an itemized deduction.
You’ll have to meet certain requirements to be eligible to take advantage of the mortgage interest deduction. The mortgage in question must be for a first or second home, classified as secured debt, and fit into at least one of three statutory categories.
What Homes Are Qualified?
The deduction for mortgage interest is only available if your debt is secured through a qualified home. This means your first or second home such as a mobile home, cooperative, house, condo, house trailer, boat, or other property that has cooking, sleeping, and toilet facilities. If you have more than one additional property outside of your primary home, you can only treat one of them as the qualified second home during the year. You can change which home this is in three different circumstances:
- If you purchase a new home, you can treat the new home as your second home on the day you purchase it
- If your primary home no longer qualifies as your first home, you can treat it as your second home as soon as you stop using it as your first home
- If your second home is sold during the year or if you make it your main home, you can select a new second home
Is Your Mortgage A Secured Debt?
You are eligible to deduct home mortgage interest if your mortgage is classified as a secured debt. This means that you have signed a document like a land contract, deed, or mortgage that:
- Provides that your home can be used to satisfy the debt in the event that you default
- Stipulates that your ownership in a qualified home serves as security for the debt payment
- Is recorded under applicable local and state laws
In simple terms, this means that your home is collateral to protect the lender’s interests. If for any reason you are unable to make the payments as processed, then your home could be used instead to cover the debt.
Additional Statutory Requirements
In most cases, you’ll be able to deduct the full amount of your mortgage interest. You just have to fit into at least one of these three categories:
- The mortgage was taken out after October 13, 1987
- Mortgages taken out after October 13, 1987 to build, buy, or improve your home so long as any mortgages under this category or the above category total $1 million or less over the course of the year (if you’re married and filing separately, this cap is $500,000)
- Mortgages taken out after October 13, 1987 for reasons outside of building, buying, or improving your home as long as the total of these does not exceed $100,000 and is no more than your home’s fair market value reduced by the numbers from the above two categories
If your loan doesn’t fit into one of these categories, however, you may only be able to deduct part of the interest.
Is The Mortgage Interest Deduction Right For Me?
Across the country, there are more than 75 million individuals who own homes. Out of those, 38.5 million take advantage of the mortgage interest deduction. The typical mortgage interest tax deduction is $12,200, which results in about $3,000 in tax savings for homeowners. This is a critical advantage for first-time homeowners and buyers who are trading up because you pay the highest amount of mortgage interest when you initially take out a mortgage. Individuals who have larger families will also get a greater advantage from a mortgage interest deduction because they tend to buy bigger houses for their families.
Remember that mortgage interest is an itemized deduction, so you’ll have to weight the benefit of itemizing your deductions against using the standard deduction. For the 2015 tax year, the standard deduction is $6,300 for a single person or for a married person filing separately, $9,250 for a head of household, and $12,600 for a married couple filing jointly. If you’re paying a mortgage, your combined itemized deductions might be greater than the standardized deductions, which saves you money.
Ohio Housing Finance Agency’s Mortgage Tax Credit: What You Need to Know
Homeowners in Ohio may be eligible to take advantage of another tax deduction opportunity offered through the Ohio Housing Finance Agency.
According to the Ohio housing Finance Agency, the Mortgage Tax Credit product can be critical for helping families achieve the dream of home ownership. This is an income tax deduction that minimizes a home’s federal income tax liability and also allows the household to have more income available to make mortgage payments.
If you use the mortgage tax credit, 20-40% of what you paid in mortgage interest will be treated as a tax credit. That means you can count it dollar-for-dollar against your income taxes. The remaining 60-80% of your mortgage interest continues to qualify as an itemized tax deduction if you have sufficient tax liability. The tax credit is
- 20% for area homes that are non-targeted
- 25% for targeted area homes
- 30% for real estate-owned (REO) properties
- 40% if the home buyer has also used an Ohio Housing Finance Agency loan
A “targeted area” is one in which the housing market is struggling; you can look up whether your home is in a targeted area online.
How Do I Know If I Qualify For This Credit?
Applicants for Ohio’s Mortgage Tax Credit have to meet purchase price and income limits. These vary by the county in Ohio in which you live. You also need to meet one of the following qualifications:
- First-time home buyer who has had no ownership interest in a principal residence in the last three years
- Purchase a home in a targeted area
- Be an honorably discharged veteran
Every year that you intend to claim this credit you must also occupy the property you are buying and pass a standard credit-check.