How to Deduct Mortgage Interest from Your Taxes

At any point in time, your mortgage can represent your largest financial commitment. Each year, you are likely to owe several thousands of dollars in mortgage interest payments to your lender. For relief, the IRS does provide for tax breaks related to mortgage interest expenses. When taking your mortgage interest deduction, you must first identify the right paperwork. Be advised that the correct tax paperwork varies between residential and investment real estate.


For residential real estate, you can deduct mortgage interest payments on your primary residence and on any other vacation homes that you own. At tax season, you will receive Form 1098, which documents the amount of mortgage interest payments made out to your lender over the prior year. Form 1098 also totals up the property taxes paid through your escrow account during the past year. With this information, you will complete IRS Schedule A and Form 1040 to deduct mortgage interest expenses away from your taxable income.

Itemized Deductions

Again, you will complete Schedule A to itemize mortgage interest expenses on residential real estate as a tax deduction. In terms of housing costs, you will also report property tax payments on the Schedule A. Beyond housing, other itemized deductions include, gifts to charity, state taxes, unreiumbursed employee expenses, certain medical bills, and tax preparation fees.

Be advised that the IRS grants you the option of either itemizing your deductions or taking the standard deduction. For a mortgage interest write off to make sense, your itemized deductions must therefore exceed your applicable standard deduction. For the 2010 tax year, you can take a standard deduction of $5,700 and $11,400 as a single and married filing jointly taxpayer, respectively.


Large itemized deductions expose you to the possibility of the alternative minimum tax (AMT). The AMT is a parallel tax code, which forces upper middle class filers to pay their fair share of taxes. To determine whether you have triggered the alternative minimum tax, you will complete worksheets within the IRS Form 1040 instructional booklet.

Investment Real Estate

For investment real estate, taking your proper mortgage interest deduction varies according to business structure. As a self employed individual, S Corporation, or partner, you will complete IRS Schedule E to report real estate profits to the IRS. Before calculating real estate profits, you will subtract mortgage interest paid to banks away from your rents and royalties received, as an owner of the property. From there, you would include real estate profits as supplemental earnings within your taxable income. Alternatively, you would file separate tax returns, if your investment real estate is held beneath a corporate umbrella. To report corporate profits, you can deduct mortgage interest expenses upon IRS Form 1120.

Share this article:

Leave a Comment