The mortgage interest deduction allows homeowners in the United States to deduct the annual amount of their mortgage interest from their taxable income. The deduction provides an incentive for individuals to purchase and upgrade homes. The following types of interest are allowed:
- On loans used to build a residence
- On loans used to purchase a residence
- On loans used to improve a residence
- On a line of credit that is secured by a residence
- On home equity loans
With certain limitations, the deduction can also be applied to loans associated with second homes. There are limitations on the total amount of mortgage interest deduction that can be claimed. This deduction is likely to be the largest itemized deduction for many homeowners; otherwise, they would probably just use the standard deduction on their income tax returns.
The mortgage interest deduction tends to skew the market for home ownership, since it effectively reduces the cost to purchase a home, thereby increasing demand. Without this deduction, home prices would likely decline to reflect the associated reduction in demand.