What part of your house payment can you deduct?

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In a Nutshell

Your monthly mortgage payment may be a big number. Typically, it’s a total made up of multiple smaller costs, like loan principal, interest, taxes and insurance. Some portions of your house payment may be tax deductible.

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When you own a home, your house payment will probably be the biggest bill you pay every month.

A house payment is often made up of multiple costs associated with having purchased the home, not just the principal and interest on a mortgage. Your lender may require you to put money every month into an escrow account from which they may pay your property taxes, homeowners insurance and private mortgage insurance, with that escrow payment being part of your monthly house payment.

Some of those costs may be deductible for homeowners who meet the criteria for certain tax breaks. Here are some portions of your house payment that you may be able to deduct from your 2017 federal income taxes.

Deducting mortgage interest

If you paid interest on a mortgage in 2017, that entire amount may be deductible from your federal income taxes provided …

  • You itemize deductions
  • You paid the interest, or it accrued, during the tax year
  • Your loan was for a principal residence or one other qualified residence (house, condo, co-op, mobile home, trailer home or boat)
  • You used the loan proceeds to buy, build, substantially improve or refinance the home that secured the mortgage
  • Your total mortgage debt (including home equity) was $1 million or less — or $500,000 or less if you were married but filing separate returns

Tax reform affected the mortgage interest deduction for homeowners with mortgages initiated between Jan. 1, 2018, and Dec. 31, 2025. Reform caps the amount of mortgage debt for which you can claim an interest deduction at $750,000. The limit is $375,000 for married couples filing separate returns.

Reform also suspended the deduction for interest on home equity debt, but the IRS has said that many homeowners will probably still be able to deduct interest on home equity loans.

Deducting PMI

If you put down less than 20% of the purchase price for your home when you initiated your mortgage, your lender might require you to carry private mortgage insurance. PMI protects the lender in case you default on your loan.

Typically, PMI is a monthly charge based on the value of your loan, and if you have to pay it, you’ll likely do so through an escrow account. To deduct PMI from your 2017 taxes, you must meet the criteria for claiming home mortgage interest. If you do, you can probably deduct the full amount of PMI premiums that your lender reports on Form 1098.

Note: the jury’s still out on whether you’ll be able to deduct PMI premiums you pay in 2018. This deduction expired on Dec. 31, 2017, and Congress would have to extend it in order for this deduction for homeowners to apply to 2018.

 

Deducting property taxes

Your lender may also require you to pay your state or local property taxes through an escrow account. If you do, the portion of your house payment that pays your property taxes may be deductible for 2017 taxes.

You may be able to take this deduction if …

  • You itemize your deductions on Schedule A
  • You paid the tax when you closed on your home or to a taxing authority during the year
  • The tax was not used to pay for a specific service provided by the taxing authority (for example, trash collection)
  • The tax wasn’t to pay for benefits that would increase the value of your property (for example, installation of sidewalks)

Tax reform capped this deduction for homeowners going forward. Beginning with the 2018 tax year, you can only deduct a total of $10,000 ($5,000 for those married filing separately) for property taxes plus state and local income taxes (or sales tax instead of income tax) combined. That means if you paid $5,000 in property tax and $6,000 in state income tax, you can only take a $10,000 deduction toward that total $11,000 cost. The rule expires on Jan. 1, 2026.

Costs you can’t deduct

Some portions of your home payment, like the following, simply aren’t deductions for homeowners:

  • Homeowners insurance
  • Fire insurance
  • Mortgage principal (the part of your mortgage payment that pays down the actual amount you borrowed)

Your lender may or may not require that you pay these costs through an escrow account.


Bottom line

Owning a home is a big investment. While some deductions for homeowners may allow you to recoup portions of your house payment, other costs are not deductible. It’s important to understand what portion of your house payment you’re allowed to deduct, and what costs you’ll have to carry on your own.