If you have a mortgage loan on your home you should expect to receive a Form 1098 Mortgage Interest Statement at tax time from your lender. Form 1098 will report the full amount of interested you paid on your load throughout the year. The lender will also send a copy of Form 1098 to the IRS as well, you are not required to file this form with your taxes. You will need to make sure any amount that you claim for mortgage interest deductions on your 1040 Schedule A matches what is noted on your Form 1098. The amount of mortgage interest you can deduct may be limited. It is advised that you retain a copy of Form 1098 for three years after you file your tax return.
Limitations to Mortgage Interest Deductions
You are limited on how much mortgage interest you can deduct each year on your taxes. Limitations are based on how you use your mortgage loan – whether if it is used to construct or build a residence. If you use a loan to obtain a home it is considered a Home Acquisition Debt, if you end up using it for other purposes it is considered Home Equity Debt. It doesn’t matter the type of loan you use or if it is backed by your first or second home, they are all subject to limitations.
Home Acquisition Debt
To be able to deduct home acquisition debt the total amount of your loan must not be greater than $1,000,000 and be either your primary or secondary residence. If you used your loan to purchase, build or improve a home you have created home acquisition debt. If you file your taxes using the status of Married Filing Separately you are subject to a reduced limit of $500,000.
Home Equity Debt
Home equity debit is considered a loan that is not used to build, purchase or upgrade a home. Your loan may also qualify if it exceeds the home acquisition debt limit but was used to improve a home significantly. You can only deduction up to $100,000 on these types of loans. If you are filing as Married Filing Separately the limit is $50,000.