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Can the Self-Employed Deduct their Home Mortgage Interest?

Stephen Fishman
Tax expert and contributor MileIQ

If you’re a self-employed homeowner, can you deduct your home mortgage interest from your taxes? Maybe… maybe not.

Being self-employed in no way prevents you from taking this deduciton. But the new tax law that went into effect in 2018 may do so. The Tax Cuts and Jobs Act (TCJA) imposed new limitations on the deduction that apply to all homeowners.

What’s the home mortgage interest deduction?

The home mortgage interest deduction allows you to deduct the interest you pay on home acquisition loans. These are loans you take out to buy, build, or improve:

  • Your main home- that is, the home where you live most of the time, and
  • A home you treat as your second home.

This deduction is one of the most popular in the tax law.

You must itemize your deductions

The home mortgage deduction is a personal itemized deduction. You take it on IRS Schedule A of your Form 1040. If you don’t itemize, you get no deduction.

You should itemize only if your total itemized deductions exceed the standard deduction. In 2017, the standard deduction was set at $6,350 for singles and $12,700 for marrieds filing jointly. About 30% of all 2017 taxpayers itemized. Of that number, about 74% took the mortgage interest deduction.

However, the TCJA almost doubled the standard deduction. For 2018, it is $12,000 for single taxpayers and $24,000 for marrieds filing jointly. As a result, far fewer taxpayers can itemize—as few as 10%. This means fewer taxpayers benefit from the mortgage interest deduction.

Example: Mort is a married self-employed salesperson. He paid $12,000 in mortgage interest in 2018. His other personal deductions for real estate taxes, charitable contributions, and other personal deductions total $6,000. Thus, his total personal deductions are only $18,000. His itemized deductions are far less than the $24,000 standard deduction he can take. As a result, Mort should not itemize. He gets no deduction for his mortgage interest.

Limits on home mortgage deduction

If you do itemize, there are new limits on the home mortgage deduction.  The limits vary according to when you bought your home.

You purchased your home before Dec. 15, 2017: In this event, you may deduct mortgage interest payments on up to $1 million in loans. Such loans must be used to buy, build, or improve the primary residence and a second house.

You purchased your home after December 15, 2017: Lower limits imposed by the TCJA apply. You may deduct the interest on only $750,000 of home acquisition debt. This is a reduction of $250,000 from prior law.

Example: Karen, a self-employed app developer, purchased a home for $1 million in 2018. She took out a home loan for $900,000. She may only deduct the interest on $750,000 of her loan.

The $750,000 loan limit will end in 2025. After then, the $1 million limit returns. These numbers are for both single taxpayers and married taxpayers filing jointly. The maximums are half as much for married taxpayers filing separately.

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Deducting home equity loan interest

Before 2018, you could deduct the interest on up to $100,000 in home equity loans. You could use the money for any purpose and still get the deduction. For example, homeowners could deduct the interest on home equity loans used to pay off their credit cards or help pay for their children’s college education.

The TCJA eliminated this $100,000 home equity loan deduction for 2018 through 2025. But the interest you pay on a home equity loan can still be deductible. This is so if you use the money to purchase, build, or improve your main or second home. The loan must be secured by your main home or second home.

For example, you can deduct the interest on a home equity loan you use to add a room to your home or make other improvements. Such a home equity loan counts towards the $750,000 or $1 million mortgage interest deduction loan limit. The interest is deductible only on loans up to the applicable limit.

How does it work?

Example: In January 2018, Sally, a self-employed consultant, takes out a $500,000 mortgage to purchase an $800,000 main home.  In February 2018, she takes out a $250,000 home equity loan. She uses the money to put an addition on the home. Both loans are secured by the home and the total does not exceed the cost of the home.

Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible.  If the home equity loan was for $300,000, the interest on $50,000 of the loan would not be deductible.

What  if Sally uses the home equity loan for personal expenses? For example, she pays off her student loans and credit cards.  In this event, none of interest on the home equity loan is deductible.

You must own the property

You’re not allowed to claim the mortgage interest deduction for someone else’s debt. In all cases, you must have an ownership interest in the home to deduct interest on a home loan. Essentially, your name has to be on the deed.

Alternatively, you must have a written agreement with the deed holder(s) that establishes you have an ownership interest. For example, a parent who buys a home for a child that is in the child’s name alone cannot deduct mortgage interest paid on the child’s behalf.

How do you know how much home loan interest you pay?

It’s easy. Your lender or lenders send you IRS Form 1098, Mortgage Interest Statement. This form shows how much interest you paid during the year.  You should receive the form by January 31, each year.

Use this information to claim the deduction. You don’t need to file the form with your taxes. Just keep it with your tax records.

For more information, see IRS Publication 936, Home Mortgage Interest Deduction.

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