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Deductions

Interest Expenses

Interest is the amount you pay for borrowing money. You must be legally liable for the debt of the borrowed money to be able to deduct the interest paid. Most interest is deductible if you itemize your deductions, unless the interest is on a rental or business property, or a student loan.

Home Mortgage Interest

Home mortgage interest is paid on a loan secured by your main or second home. The loan can be a loan to buy your home, a home equity loan, line of credit, or a second mortgage. Most home mortgage interest is reported on Form 1098 by the financial institution to which you make payments.

Your main home is the home where you live most of the time. The home can be a house, cooperative apartment, mobile home, condominium, mobile home, house trailer, or a houseboat with sleeping, toilet, and cooking facilities.

Your second home is any other residence you own and treat as your second home. You do not have to use the home during the year; however, if you rent it to others, you must also use it as a home for 14 days or 10% of the number of days you rent it, whichever is greater.

Qualifying Home Mortgage Interest

If your mortgages fit into one or more of these categories at all times during the year, you can deduct the interest on the loans.

  • You took out the mortgages on or before October 13, 1987 (called grandfathered debt).
  • You took out the mortgages after October 13, 1987 to buy, build, or improve your home. The mortgages plus any grandfathered debt must not exceed $1 million ($500,000 if your filing status is married filing separately).
  • You took out the mortgages after October 13, 1987 for reasons other than to buy, build, or improve your home, but only if these mortgages total $100,000 or less ($50,000 if your filing status is married filing separately). Additionally, the total of all mortgages on the home cannot exceed the fair market value of the home.

If your mortgage doesn't fit into one of these categories, you may be able to deduct a portion of the interest paid.

Investment Interest

Investment interest is paid on debt to purchase or carry property held as an investment. You can deduct investment interest only to the extent of your net investment income.

Investment interest includes:

  • Interest allocable to portfolio income under the Passive Activity Loss (PAL) rules
  • Interest derived from an activity involving trade or business in which you did not materially participate and which is not considered a passive activity
  • Any deductible amount connected with personal property used in a short sale

Investment income includes:

  • Non-business or non-trade income from interest, dividends, rents, royalties, and other income generated from investment properties
  • Net gain on the disposition of a property held for investment
  • Gross portfolio income under PAL rules
  • Income from activities involving trade, or business in which you do not materially participate

Non-Deductible Interest

You cannot deduct personal interest. Personal interest is interest paid on a loan to purchase personal property such as a car, credit card, installment interest for personal expenses, and other non-business related properties.

For more information please see IRS Tax Topic 505 - Interest Expense.