Topic Number 505 - Interest Expense
Interest is an amount you pay for the use of borrowed money. Some interest can be claimed as a deduction or as a credit. To deduct interest you paid on a debt, review each interest expense to determine how it qualifies and where to take the deduction. For more information, see Publication 17, Your Federal Income Tax for Individuals, and Publication 550, Investment Interest and Expenses.
When you prepay interest, you must allocate the interest over the tax years to which the interest applies. You may deduct in each year only the interest that applies to that year. However, an exception applies to points paid on a principal residence, see Topic No. 504.
Types of interest deductible as itemized deductions on Form 1040, Schedule A.pdf, Itemized Deductions, include:
- Investment interest (limited to your net investment income) and
- Qualified mortgage interest including points (if you're the buyer); see below.
Types of interest deductible elsewhere on the return include:
- Student loan interest as an adjustment to income on Form 1040.pdf or Form 1040A.pdf, U.S. Individual Income Tax Return. For more information, refer to Topic No. 456, Publication 970, Tax Benefits for Education, and Can I Claim a Deduction for Student Loan Interest?
- Non-farm business interest. See Publication 334, Tax Guide for Small Business, and Publication 535, Business Expenses
- Farm business interest. See Publication 225, Farmer's Tax Guide, and Publication 535
- Interest incurred to produce rents or royalties (this may be limited). See Publication 527, Residential Rental Property, and Publication 535
Types of interest not deductible include personal interest, such as:
- Interest paid on a loan to purchase a car for personal use.
- Credit card and installment interest incurred for personal expenses.
- Points (if you're a seller), service charges, credit investigation fees, and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities.
Mortgage Interest Deduction
Qualified mortgage interest includes interest and points you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time, such as a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat. It must have sleeping, cooking, and toilet facilities. You can also treat amounts you paid during the year for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.
A second home can include any other residence you own and choose to treat as a second home. You don't have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest. For more information regarding a qualified residence (home), see Publication 936, Home Mortgage Interest Deduction and Can I Deduct My Mortgage-Related Expenses?
Qualified mortgage interest and points are generally reported to you on Form 1098.pdf, Mortgage Interest Statement, by the financial institution to which you made the payments. The following mortgages yield qualified mortgage interest and you can deduct all of the interest on these mortgages:
- A mortgage you took out on or before October 13, 1987 (grandfathered debt)
- A mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) but only if throughout the year these mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you're married filing separately.
- Home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if you're married filing separately. Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt.
If one or more of your mortgages doesn't fit into any of these categories, refer to Publication 936, Home Mortgage Interest Deduction, to figure the amount of interest you can deduct as an itemized deduction. You may be subject to a limit (phaseout) on some of your itemized deductions including mortgage interest. For more information on the limitations based on your adjusted gross income, please refer to the Form 1040 General Instructions and Topic No. 501.
Mortgage Interest Credit
You may be able to take a credit against your federal income tax for certain mortgage interest if a mortgage credit certificate (MCC) was issued to you by a state or local government for low-income housing. Use Form 8396.pdf, Mortgage Interest Credit, to figure the amount. For further information, refer to Publication 530, Tax Information for Homeowners. If you sell your home after you've taken this credit and/or the First-Time Homebuyer credit, you may have to repay all or part of the credit(s). For information on repayment of a mortgage subsidy, see Publication 523, Selling Your Home. For repayment of the First-time Homebuyer credit, refer to Topic No. 611.