The mortgage interest deduction is usually the largest deduction for most taxpaying individuals and if you are legally liable for a “secured debt” on a “qualified home,” then you better be itemizing your return and taking this deduction. Publication 936  explains all the rules and gory details involved with the mortgage interest rate deduction and it’s important if you have some special scenario, but for most people with simple scenarios, Pub 936 is overkill and I’ll explain what I know of it below.
Acquisition versus Equity Debt
Basically, there are two types of debt – acquisition debt and equity debt. Acquisition debt is the debt you assumed when you purchased the house whereas equity debt is like a line of credit or a loan you acquired to make improvements onto the house. If you have mortgage debt, you can claim the full interest deduction if the loan is under $1.1M for married couples, $500,000 for single filers. If you have home equity debt, you can claim the full interest deduction if the loan is under $100,000 for married couples, $50,000 for single filers.
So, what counts as a qualified home? If it has sleeping, cooking, and toilet facilities then it is considered a home – so this would include things like a condominium, a mobile home, a trailer and boats if they have those facilities, in addition to your primary and secondary residences. For second homes, you can deduct interest from only one of them and you have to use it at least 14 days during the year. If you rent it out, you must use it more than 10% of the time that it’s rented out in order to claim the interest deduction, otherwise the interest must be listed on Schedule E instead of Schedule A.
Taking the Deduction
Bottom line, your lender will send you a Form 1098: Mortgage Interest Statement and that’s all you need to prove to the IRS that you’ve paid interest so save it.
Standard Deduction or Itemize Deductions & Claim Mortgage Interest?
Well, the standard deduction for 2006 for a single filer was $5,150 so a single filer would need to pay more than $5,150 in mortgage interest (assuming no other itemized deductions) in order for itemizing to be “worth it.” For married filing jointly, that magic number is $10,300. For most folks, itemizing will be worth it, at least in the beginning of the mortgage.