In order to deduct your home mortgage interest you must file a Schedule A for itemized deductions on your 1040 tax return. You must be the one legally liable for the loan and you must have a true debtor/creditor relationship with the lender. The mortgage you are claiming the interest on must be a secured debt on a qualified home that you have an ownership interest in.
What does Secured Debt Mean?
Secured debt is a debt where you have signed a mortgage, land contract, deed of trust or another instrument that makes the qualified home that you own security for the debt. It says that if you default on your payments the home is enough to satisfy the debt and the instrument is recorded by standards set by the laws of your state. Simply put, the home is collateral for the debt and thus protects the lender in case of default.
If you have an owner held mortgage and it is not recorded then the interest is not deductable. Other debts such as debts secured by your general assets or judgment liens are not secured by your home and the interest is not deductable.
What is a Qualified Home?
To take the interest deduction the interest must be secured by your qualified home. The IRS definition of a qualified home is a house, mobile home, condo, co-op, boat or house trailer that has cooking, sleeping and toilet facilities. This can include your main home or second home. Any interest you pay on a mortgage other than these may still be deductable if the loan was used for business, investment or other deductable purposes. If it was not then the IRS considers the interest to be personal interest and it is not deductable.
Your main home is defined as the home where you live most of the time. You can only have one main home at a time. Your second home is any home that you own that you treat as a second home. You don’t have to live in the home but you can’t rent it out at any time during the year if you don’t use it. If you do rent your second home out for part of the year you must use the home for more than 14 days or more than 10% of the number of days that you rented the home, whichever is longer. If you don’t use the home long enough the IRS considers it a rental property and not a second home. You may only have one second home at a time.
If you use part of your qualified home as a home office or rent part of your home to someone else; the amount of your deduction may change. There are many other special situations that allow you to add certain fees to your interest deduction. You can deduct late payment fees and pre-payment penalty fees that you have paid as long as they were not charged to you for a service that the lender provided. You may also deduct interest that you paid up until the time you sold your home if have sold your home in the given year.