ExamFinch.com My Study

Study guide

7.4 Mortgage Interest Deduction

Practice this exam

Enrolled Agent EA

Track your progress as you read

Finished sections get a check mark.

1 Part 1, Chapter 1: Tax Return Basics & Filing Requirements

1.1 Form 1040 Overview & Structure 1.2 Form 1040-SR for Seniors 1.3 Who Must File (Income Thresholds) 1.4 Filing Deadlines & Extensions (Form 4868) 1.5 Penalties: Failure to File vs. Failure to Pay 1.6 Sources of Tax Information (W-2s, 1099s, K-1s) 1.7 Preparer Due Diligence Requirements 1.8 Amended Returns (Form 1040-X)

2 Part 1, Chapter 2: Filing Status & Dependents

2.1 Single & Married Filing Jointly 2.2 Married Filing Separately 2.3 Head of Household Requirements 2.4 Qualifying Surviving Spouse 2.5 Qualifying Child Test (5 Tests) 2.6 Qualifying Relative Test (4 Tests) 2.7 SSN, ITIN & Residency Status

3 Part 1, Chapter 3: Wages & Employee Compensation

3.1 W-2 Income & Withholding 3.2 Employee vs. Independent Contractor 3.3 1099-NEC, 1099-MISC & 1099-K Reporting 3.4 Fringe Benefits (Taxable vs. Non-Taxable) 3.5 Stock Options (ISO vs. NQSO) 3.6 Special Categories (Clergy, Military, Foreign)

4 Part 1, Chapter 4: Interest, Dividends & Other Income

4.1 Taxable vs. Tax-Exempt Interest 4.2 US Savings Bonds & OID 4.3 Ordinary vs. Qualified Dividends 4.4 Schedule B Requirements 4.5 Rental & Royalty Income Basics 4.6 Alimony, Gambling & Other Income 4.7 Cancelled Debt & Form 1099-C 4.8 Net Operating Loss (NOL)

5 Part 1, Chapter 5: Capital Gains & Property Transactions

5.1 Capital vs. Non-Capital Assets 5.2 Cost Basis Calculation 5.3 Inherited & Gifted Property Basis 5.4 Short-Term vs. Long-Term Gains 5.5 Capital Gains Tax Rates (0%, 15%, 20%) 5.6 Netting & the $3,000 Loss Limit 5.7 Wash Sales & Related Party Rules 5.8 Sale of Primary Residence (Section 121) 5.9 Installment Sales (Form 6252) 5.10 Like-Kind Exchanges (Section 1031)

6 Part 1, Chapter 6: Adjustments to Income

6.1 Educator Expenses & HSA Contributions 6.2 Self-Employment Tax Deduction 6.3 IRA Contributions (Traditional) 6.4 Student Loan Interest Deduction 6.5 Alimony Paid (Pre-2019 Divorces) 6.6 Other Adjustments & New OBBBA Deductions (Tips, Overtime, Auto Loan, Senior Bonus)

7 Part 1, Chapter 7: Deductions (Standard & Itemized)

7.1 Standard Deduction by Filing Status 7.2 Medical & Dental Expenses (7.5% Floor) 7.3 State & Local Taxes (SALT $40K Cap) 7.4 Mortgage Interest Deduction 7.5 Charitable Contributions 7.6 Casualty & Theft Losses 7.7 QBI Deduction (Section 199A)

8 Part 1, Chapter 8: Tax Calculation & Credits

8.1 Tax Tables & Rate Schedules 8.2 Alternative Minimum Tax (AMT) 8.3 Self-Employment Tax Calculation 8.4 Child Tax Credit & Additional CTC 8.5 Earned Income Tax Credit (EITC) 8.6 Education Credits (AOC & LLC) 8.7 Child & Dependent Care Credit 8.8 Other Credits (Saver's, Premium Tax)

9 Part 1, Chapter 9: Retirement Accounts & Social Security

9.1 Traditional vs. Roth IRA 9.2 401(k), 403(b) & TSP Basics 9.3 SEP-IRA & SIMPLE IRA 9.4 Required Minimum Distributions (RMDs) 9.5 Early Withdrawal Penalties & Exceptions 9.6 Social Security Taxation

10 Part 1, Chapter 10: Specialized Individual Returns

10.1 Estate Tax (Form 706) 10.2 Gift Tax (Form 709) 10.3 Foreign Income (Form 2555) 10.4 FBAR & FATCA Reporting 10.5 Farm Income (Schedule F) 10.6 Disaster Area Rules

11 Part 2, Chapter 11: Business Entity Types

11.1 Overview of Entity Types 11.2 State Law vs. Tax Classification 11.3 Entity Selection: Reasonable Comp & QBI 11.4 Form 8832 & Rev. Proc. 2009-41 11.5 LLC Deep Dive: Spouses & EINs 11.6 Changing Status: The 60-Month Rule

12 Part 2, Chapter 12: Starting a Business

12.1 Hobby vs. Business (Profit Motive) 12.2 Employer Identification Number (EIN) 12.3 Tax Year Selection 12.4 Recordkeeping Requirements 12.5 Statute of Limitations 12.6 Related Party Transactions 12.7 Start-Up Costs, Entity Choice & OBBBA Business Changes (2025)

13 Part 2, Chapter 13: Worker Classification & Payroll

13.1 Employee vs. Independent Contractor 13.2 Common Law Test (Behavioral, Financial, Relationship) 13.3 Statutory Employees & Non-Employees 13.4 Form 941 & Payroll Deposits 13.5 Trust Fund Recovery Penalty 13.6 FUTA & Unemployment Taxes

14 Part 2, Chapter 14: Accounting Methods & Income

14.1 Cash vs. Accrual Method 14.2 Hybrid Methods & Changes 14.3 Inventory & COGS 14.4 Gross Receipts & Income Recognition 14.5 Constructive Receipt 14.6 Form 1099 Reporting Requirements 14.7 §163(j) Business Interest Expense Limitation 14.8 §174 Research & Experimental Expenditures

15 Part 2, Chapter 15: Depreciation & Asset Treatment

15.1 MACRS Basics & Recovery Periods 15.2 Mid-Month, Mid-Quarter, Half-Year Conventions 15.3 Section 179 Expense Deduction 15.4 Bonus Depreciation 15.5 Listed Property Rules 15.6 Amortization of Intangibles 15.7 Depletion 15.8 Disposition of Business Assets

16 Part 2, Chapter 16: Business Deductions

16.1 Ordinary & Necessary Test 16.2 Business Travel Expenses 16.3 Business Meals (50% Limitation) 16.4 Business Use of Vehicle 16.5 Home Office Deduction 16.6 Business Interest Limitation (163(j)) 16.7 Business Bad Debts

17 Part 2, Chapter 17: Business Credits & Fringe Benefits

17.1 General Business Credit Overview 17.2 R&D Credit & Disabled Access Credit 17.3 Small Employer Health Insurance Credit 17.4 Fringe Benefit Rules 17.5 Cafeteria Plans (Section 125) 17.6 Achievement Awards & Other Benefits

18 Part 2, Chapter 18: Sole Proprietorships

18.1 Schedule C Overview 18.2 Calculating Net Profit/Loss 18.3 Self-Employment Tax (Schedule SE) 18.4 Estimated Tax Payments 18.5 Hobby Loss Rules

19 Part 2, Chapter 19: Partnerships

19.1 Partnership Formation 19.2 Partner's Basis Calculation 19.3 Form 1065 Overview 19.4 Schedule K-1 (Partner's Share) 19.5 Guaranteed Payments 19.6 Partnership Distributions 19.7 At-Risk & Passive Activity Rules 19.8 Partnership Termination & Liquidation

20 Part 2, Chapter 20: C Corporations

20.1 Form 1120 Overview 20.2 Corporate Tax Rate (21%) & CAMT 20.3 Accumulated Earnings Tax 20.4 Dividends Received Deduction 20.5 Earnings & Profits (E&P) 20.6 Corporate Distributions, Dividends & Stock Redemptions 20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions 20.8 Corporate Liquidation

21 Part 2, Chapter 21: S Corporations

21.1 S Election Requirements (Form 2553) 21.2 Form 1120-S Overview 21.3 Shareholder Basis Calculation 21.4 Reasonable Compensation 21.5 S Corporation Distributions 21.6 Built-In Gains Tax & Termination

22 Part 2, Chapter 22: Specialized Business Returns

22.1 Trusts & Estates (Form 1041) 22.2 Simple vs. Complex Trusts 22.3 Distributable Net Income (DNI) 22.4 Tax-Exempt Organizations (Form 990) 22.5 Retirement Plans (Form 5500) 22.6 Qualified Retirement Plans Overview 22.7 Farm Taxation 22.8 Rental Real Estate Activities

23 Part 3, Chapter 23: Practice Before the IRS

23.1 What is Practice Before the IRS? 23.2 Who Can Practice (Full Rights) 23.3 Limited Practice Rights (AFSP, Unenrolled) 23.4 Special Relationships (Family, Employees) 23.5 PTIN Requirements 23.6 Circular 230 Overview 23.7 Office of Professional Responsibility (OPR)

24 Part 3, Chapter 24: Becoming & Maintaining EA Status

24.1 Two Paths to EA (Exam vs. IRS Experience) 24.2 Application Process (Form 23) 24.3 Background & Compliance Checks 24.4 Renewal Requirements (Form 8554) 24.5 Continuing Education Requirements 24.6 Inactive Status & Termination

25 Part 3, Chapter 25: Practitioner Duties (Circular 230)

25.1 Due Diligence Requirements 25.2 Knowledge of Client's Omission 25.3 Conflict of Interest Rules 25.4 Fee Requirements (Contingent, Unconscionable) 25.5 Advertising & Solicitation Rules 25.6 Tax Return Position Standards 25.7 Written Advice Standards 25.8 Sanctions & Penalties for Violations

26 Part 3, Chapter 26: Power of Attorney & Authorization

26.1 Form 2848 (Power of Attorney) 26.2 CAF (Centralized Authorization File) 26.3 Form 8821 (Tax Information Authorization) 26.4 Third-Party Designee 26.5 Signing Returns for Taxpayers 26.6 Client Confidentiality & Privilege 26.7 Representing Clients in Audits (Examination) 26.8 Appealing IRS Decisions 26.9 Collection Representation

27 Part 3, Chapter 27: Legal Authority & Research

27.1 Hierarchy of Tax Authority 27.2 Internal Revenue Code 27.3 Treasury Regulations 27.4 Revenue Rulings & Procedures 27.5 Court Cases & Precedent 27.6 Statutes of Limitations

28 Part 3, Chapter 28: Specific Representation Issues

28.1 Trust Fund Recovery Penalty (TFRP) 28.2 Innocent Spouse Relief (Form 8857) 28.3 Injured Spouse Allocation (Form 8379) 28.4 Penalty Abatement (FTA & Reasonable Cause) 28.5 Taxpayer Advocate Service (TAS) 28.6 Freedom of Information Act (FOIA)

29 Part 3, Chapter 29: Final Review & Exam Strategy

29.1 Exam Structure & Logistics (2026-2027) 29.2 The "Clock" of Representation (Master Deadlines) 29.3 Ethics vs. Law (Sanctions & Penalties) 29.4 Final Mock Review & Exam Strategy

30 Part 3, Chapter 30: Filing Process & E-File

30.1 E-File Requirements (The "More Than 10 Returns" Rule) 30.2 ERO Responsibilities 30.3 EFIN & Application Process 30.4 Form 8879 (Signature Authorization) 30.5 Record Retention & Data Security (WISP) 30.6 Preparer Penalties (Filing Specific)

7.4 Mortgage Interest Deduction

Key Takeaways Explain This Topic AI

Acquisition indebtedness limit of $750,000 ($375,000 MFS) for post-12/15/2017 mortgages was made PERMANENT by OBBBA (was scheduled to revert to $1M); pre-12/16/2017 loans retain the $1M / $500K grandfathered limit

Home equity loan interest is deductible only if proceeds buy, build, or substantially improve the residence securing the loan — also made permanent by OBBBA

A qualified residence means the main home plus ONE second home — no more than two homes qualify

Points paid on a home purchase are generally deductible in the year paid; points on a refinance must be amortized over the loan term

  • Mortgage insurance premiums (PMI) are NOT deductible for 2025 — OBBBA did not restore the PMI deduction
  • Last updated: October 2026

The home mortgage interest deduction is one of the most valuable tax benefits for homeowners who itemize. The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes effective 2018-2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the TCJA mortgage-interest rules PERMANENT rather than letting them sunset back to the pre-TCJA $1,000,000 limit.

Itemized Deduction Requirement

Mortgage interest is only deductible if the taxpayer itemizes on Schedule A. With the 2025 standard deduction at $15,750 (Single) / $31,500 (MFJ)—and even higher with the new Senior Bonus—many homeowners still find itemizing does not produce a benefit. The expanded SALT cap (up to $40,000) does, however, push more high-tax-state homeowners back into itemizing.

Acquisition Indebtedness Limits — Now Permanent

The amount of mortgage interest you can deduct depends on when the mortgage originated:

  • Loan Origination Date Debt Limit MFS Limit Key Rule
  • On or before December 15, 2017 $1,000,000 $500,000 Grandfathered — original limits apply
  • After December 15, 2017 $750,000 $375,000 TCJA limit — MADE PERMANENT by OBBBA
  • Binding contract before Dec 15, 2017, closed by April 1, 2018 $1,000,000 $500,000 Special transition rule

Acquisition indebtedness is debt incurred to buy, build, or substantially improve a qualified residence. The residence must secure the loan.

OBBBA Update: Before OBBBA, the $750,000 cap was scheduled to expire after 2025, with the $1M limit returning in 2026. OBBBA struck the sunset—the $750,000 cap is now permanent unless changed by future legislation.

Combined Debt Calculation

When a taxpayer has both grandfathered debt (pre-12/16/2017) and newer debt:

  • The grandfathered debt uses the $1 million limit first
  • The remaining capacity under $750,000 is reduced by the grandfathered amount
  • If grandfathered debt is $750,000 or more, NO new debt qualifies

Example: Maria has a $600,000 mortgage from 2015 (grandfathered). In 2025, she takes out a $300,000 loan on a second home.

  • Grandfathered debt: $600,000 (within $1M limit – fully deductible)
  • New debt capacity: $750,000 – $600,000 = $150,000
  • Only $150,000 of the new $300,000 loan qualifies
  • Allocate interest proportionally (50% deductible on the new loan)
  • Qualified Residence Definition

A qualified residence includes:

  • Main home (principal residence)
  • One second home (you elect which property each year)

Important Limits:

Maximum of TWO qualified residences (main + one second)

Second home must be used personally—if rented out, you must use it for the greater of 14 days or 10% of rental days

  • A boat or RV with sleeping, cooking, and toilet facilities can qualify
  • Pre-TCJA vs. Post-OBBBA Comparison
  • Feature Pre-TCJA (Before 2018) TCJA / OBBBA (2018+, now permanent)
  • Acquisition Debt Limit $1,000,000 $750,000 (permanent)
  • MFS Acquisition Limit $500,000 $375,000 (permanent)
  • Home Equity Debt Limit $100,000 $0 unless used to buy/build/improve (permanent)
  • Home Equity Interest Deductible Yes, regardless of use Only if used to buy/build/improve (permanent)
  • Number of Homes Main + 1 second Main + 1 second
  • Home Equity Loan Interest — Now Permanent

This is a major rule that OBBBA made permanent . It is heavily tested on the EA exam.

Pre-TCJA Rule: Interest on up to $100,000 of home equity debt was deductible regardless of how proceeds were used.

Post-TCJA / Post-OBBBA Rule (permanent): Home equity interest is ONLY deductible if proceeds buy, build, or substantially improve the qualified residence that secures the loan.

Deductible Uses (interest IS deductible):

  • Adding a room or bathroom
  • Installing a new roof
  • Renovating the kitchen
  • Building a deck or garage

Non-Deductible Uses (interest is NOT deductible):

  • Paying off credit card debt
  • Buying a car
  • Paying for college tuition
  • Taking a vacation
  • Paying medical bills

Documentation Tip: Keep records showing how proceeds were used. The IRS may require proof that funds went to qualifying home improvements.

Points (Loan Origination Fees)

Points are prepaid interest charged by lenders at closing. Each point equals 1% of the loan amount. Deduction rules differ for purchase vs. refinance:

Loan Type Deduction Timing Requirements

Home Purchase Fully deductible in year paid Cash-method taxpayer; secured by main home; points are an established practice in area; amount is reasonable

Refinance Amortized over loan term Spread deduction evenly over loan's life

Refinance for Home Improvement Portion used for improvement may be deductible in year paid Allocate proportionally

Refinance Calculation Example: A taxpayer pays $3,600 in points on a 30-year refinance.

  • Monthly deduction: $3,600 ÷ 360 months = $10
  • Annual deduction: $10 × 12 = $120/year

Early Payoff or Refinance Exception: If the loan is paid off early or refinanced with a different lender, the remaining unamortized points can be deducted in full in that year. If refinancing with the same lender, you must add the old unamortized points to the new points and amortize the combined total over the new term.

Mortgage Insurance Premiums (PMI/MIP)

Tax Year 2025 Status: Mortgage insurance premiums are NOT deductible for personal residences.

  • Tax Year PMI Deductible? Authority
  • 2007-2021 Yes (with income limits) Various extender acts
  • 2022-2025 No Deduction expired; OBBBA did NOT restore it

Key Point for EA Exam: For the 2025 tax year (tested July 2026 – February 2027), PMI is NOT deductible on Schedule A for personal residences. OBBBA restores the treatment of qualified mortgage insurance premiums as qualified residence interest beginning in 2026; that restoration does not apply to 2025. Form 1098 Box 5 may still show PMI paid, but the amount is not deductible.

Exception for Rental Properties: PMI on rental property mortgages is deductible as a rental expense on Schedule E, Line 9 (Insurance) — unchanged.

Form 1098: Mortgage Interest Statement

Lenders issue Form 1098 to report mortgage interest and related items.

  • Box Content Notes
  • Box 1 Mortgage Interest Received Total deductible interest paid
  • Box 2 Outstanding Mortgage Principal Balance as of January 1 (or origination date)
  • Box 3 Mortgage Origination Date When the loan was originated
  • Box 4 Refund of Overpaid Interest Reduces deductible interest
  • Box 5 Mortgage Insurance Premiums PMI/MIP paid (NOT deductible for 2025)
  • Box 6 Points Paid on Purchase Points on main home purchase
  • Boxes 7-8 Property Address Address of property securing mortgage

Reporting Threshold: Lenders must issue Form 1098 if they received $600 or more in mortgage interest during the year.

Multiple Borrowers: Form 1098 is issued only to the payer of record (typically the first borrower listed).

EA Exam Tips

Know the dates: December 15, 2017 is the cutoff—loans after this use the $750,000 limit (now permanent under OBBBA).

MFS halves the limit: $375,000 for post-12/15/2017 loans.

Home equity trap: Interest is ONLY deductible if the loan is used to buy/build/improve the residence. OBBBA made this permanent.

Points timing: Purchase = deduct now; Refinance = amortize. Know the early-payoff exception.

PMI for 2025: NOT deductible for personal residences (OBBBA did not restore).

Two-home limit: Only main home plus ONE second home qualify.

Itemizing required: None of these deductions matter if the taxpayer takes the standard deduction.

OBBBA permanence: Don't expect the $1M limit to return in 2026—it was made permanent at $750K.