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Can Self-Employed Individuals Take The Mortgage Interest Deduction?

Are there any tax benefits of owning a home? If you're a self-employed homeowner with a mortgage, there's good news for you. You get some extra perks in the form of additional mortgage tax deductions. One of the important ones is the mortgage interest deduction. This deduction differs from the usual 1099 tax deductions you might be used to. For one, it’s an itemized personal expense rather than a business deduction. Second, it’s available to all taxpayers. Keep reading to find answers to questions like is mortgage interest deductible, is mortgage insurance tax deductible, what is the mortgage interest credit and how to claim mortgage interest on your taxes.

Table of contents

Key takeaways...Read more

Is it harder to get a mortgage loan if I’m self-employed?...Read more

How do I become an ideal candidate for a mortgage loan?...Read more

Increase your credit rating...Read more

Self-employment track record...Read more

Contribute a larger down payment...Read more

Cooperate with the lender...Read more

Large emergency fund...Read more

The mortgage interest tax deduction...Read more

How much mortgage interest can I deduct on my taxes?...Read more

Is mortgage insurance tax deductible?...Read more

Special conditions for the home mortgage interest deduction...Read more

How can you write off mortgage interest?...Read more

The mortgage interest credit...Read more

Key takeaways

Homeowners can claim the mortgage interest tax deduction if they itemize their personal expenses.
The mortgage interest deduction limit depends on your filing status and whether you took out the loan before December 2017.
The mortgage interest credit is available to low-income taxpayers to help them purchase homes.

Is it harder to get a mortgage loan if I’m self-employed?

Let’s first talk about getting a mortgage as a self-employed individual. Is it difficult? The main hurdle that 1099 workers face is inconsistent income. A fluctuating income is usually not good news when looking out for mortgage loans, and you'll have to provide more paperwork to lenders to gain their trust. When you’re self-employed, you might have income sources, which may not necessarily be equal. For example, if you have six clients, there's a high chance that all these clients won't pay you equally. Some clients might also only stay with you for a limited time. In addition, a lender will seek your bank statement and income tax return over the past years before loaning you a mortgage amount. So, whether you're a social media influencer or a delivery driver, it can be tough to prove your income. Keeping records of your income and any proof of making estimated tax payments can help. But of course, it's not impossible to buy a house when self-employed. It's much easier in some cases. If your loan-to-value (LTV) ratio is lower, it will be much easier for a lender to sanction a mortgage loan. An LTV ratio is the measure of risk associated with lending. The lower your LTV ratio, the more likely you’ll get a mortgage loan.

How do I become an ideal candidate for a mortgage loan?

Becoming a perfect candidate for a mortgage or self-employment loan isn't rocket science, and you have to keep a few things in mind to increase your likelihood of getting a mortgage and taking the mortgage interest tax deduction.

Increase your credit rating

One essential thing is to have a high credit score. This will instantly make you an ideal candidate for a mortgage loan. Your credit score tells a lender that you pay all your debts responsibly and promptly.

Self-employment track record

Your chances of getting a mortgage increase if you have been filing self-employment taxes for more than two years. However, the lender will look into your yearly income return to finalize a loan.

Contribute a larger down payment

You can put down a sizable down payment sum upfront for the house. This will lower the risk of the lender and will increase the chances of you getting a mortgage loan.

Cooperate with the lender

There's a high chance that you might have to present several documents to the lender, apart from just your previous year's income tax return. These papers could be profit and loss statements, balance sheets and bank statements, which would offer insight into your finances to the lender.

Large emergency fund

As an entrepreneur, you should have a large enough emergency fund to easily offset your debt if your business encounters financial problems. In addition, the lender wants to ensure you can pay your mortgage despite a financial crisis.

Infographic entitled Tax Benefits Of Owning A Home listing some write-offs apart from the mortgage tax deduction for homeowners.

The mortgage interest tax deduction

Let’s say you do end up getting a mortgage loan and successfully buy a home. Does that mean you can claim a mortgage as a tax deduction? Unfortunately, homeowners cannot deduct their mortgage from their taxes. At this point, you might be asking, “Can I deduct mortgage interest?” If you've got a home loan, the mortgage interest deduction lets you lower the amount of money the IRS considers your income. It's like a discount based on the interest you paid on your loan and a few related expenses throughout the year. The mortgage interest deduction serves as a tax perk tailored for homeowners. Opting to itemize deductions allows homeowners to deduct the interest they've paid on their mortgage, effectively reducing their taxable income. Additionally, this tax advantage extends to loans for second homes as long as the claimed deduction falls within the specified limits outlined by the IRS. You can only deduct mortgage interest on your primary residence or second home if the loans were used to buy, build or improve the property or for a business-related investment. If the interest doesn't meet these criteria, it doesn't qualify for a mortgage tax deduction from your income. If you've refinanced your main or second home, you could still qualify for the mortgage interest deduction.

Infographic entitled What Qualifies As Mortgage Interest listing expenses that answer the question is mortgage interest deductible.

How much mortgage interest can I deduct on my taxes?

You can usually deduct the mortgage interest you paid in the tax year on the first $750,000 of your mortgage for your main or second home. For those who are married but filing separately, the mortgage interest limitation is $375,000. However, if you bought the house before December 16, 2017, you can deduct interest on the first $1 million of the mortgage ($500,000 if married filing separately). A mortgage interest deduction calculator can help you calculate your deduction amount or ask a tax pro for help. You can also look at IRS Publication 936.

Infographic entitled How Much Mortgage Interest Can I Deduct showing the limits for claiming home mortgage interest deduction.

Is mortgage insurance tax deductible?

Mortgage insurance is not tax deductible, but taxpayers could actually deduct mortgage insurance premiums from their taxes, up until 2021. So if you’re asking, “Is PMI (Private Mortgage Insurance) still tax deductible?” that’s your answer. Apart from mortgage insurance, there are also a few other mortgage-related expenses that can’t be a tax deduction:

Homeowners insurance
Closing costs
Settlement costs
Mortgage insurance premiums
Moving costs
Extra principal payments made on your mortgage
Interest accrued on a reverse mortgage
Deposits, down payments, or earnest money that you forfeited

Special conditions for the home mortgage interest deduction

The IRS has a few exceptional situations that might affect whether mortgage interest is tax deductible. You can find the whole list in Publication 936.

If you've used the proceeds of a home loan for business purposes, report the interest on Schedule C if you're a sole proprietor or on Schedule E if used for purchasing rental property.
If you used the home mortgage proceeds for tax-exempt investments or insurance, you cannot deduct the mortgage interest.
If you and your ex-spouse own a home and one of you paid the mortgage after a divorce or separation, each of you can deduct half of the total payments made. The other person needs to include the other half as alimony.
Interest on loans against rental property, even if used to buy a home, doesn't qualify as mortgage interest because the home can’t be used as a collateral. Such interest can't be deducted as a rental expense.
Payments made for living in a house before the purchase is finalized are considered rent and cannot be deducted as interest.

How can you write off mortgage interest?

Here's the deal: if you want to save some money on your taxes by claiming the mortgage interest deduction, do it in the same year you pay the interest. Easy, right? If you're dealing with points, you can spread out that deduction over the life of your mortgage. But to get this deduction, you have a choice to make – decide whether it's smarter to deduct your mortgage interest by itemizing your expenses or going for the standard deduction. In 2024, the standard deduction is $14,600 for singles and $29,200 for married couples filing jointly. So, here's the deal: if the total of your mortgage interest and any other deductions you qualify for adds up to more than those standard amounts, it's worth it to go the itemizing route. Otherwise, the standard deduction might be the simpler and more beneficial option. Choosing to itemize your expenses means filling out a Schedule A when you file your taxes. To claim mortgage interest, follow these steps:

Wait for your lender to send you Form 1098 by early February
Add up all qualifying expenses to see if it’s greater than the standard deduction amount
Report mortgage interest on Schedule A

Infographic entitled Reporting Mortgage Expenses showing where to enter mortgage interest that is tax deductible and other related costs.

If you use FlyFin, there’s no need for a mortgage interest deduction calculator or any kind of math. CPAs help you navigate the mortgage interest deduction limit and prepare and file your taxes. If you’re self-employed with a lot of business expenses, A.I. finds every deduction you can write off, making tax season stress-free!

The mortgage interest credit

The mortgage interest credit is crafted to assist lower- to moderate-income individuals make homeownership more affordable. If you qualify for this credit, you can claim it annually for a portion of the mortgage interest you've paid. If you qualify, you can snag a credit every year using Form 8396 for a chunk of the mortgage interest you paid. But there are a few rules to follow:

Your home needs to meet certain price and value rules for your local housing scene.
The house tied to the certificate should be in the same area as the agency giving it out.
This place has to be where you live the most—your primary residence.

Now, if you're the type who itemizes your deductions on Schedule A, you have to balance out your mortgage interest deduction with the credit you're claiming. If you decide to refinance, you'll need a new mortgage credit certificate. And if you sell your place within nine years, you might have to pay back a bit of that credit. As usual, keeping your records up-to-date and reaching out to your lender if you haven't gotten the necessary forms on time is essential. So, if you’re a self-employed homeowner, go ahead and maximize your savings!

Phone Tax Deduction

Cell phones can be a business tax deduction for self-employed individuals if it is an ordinary and necessary expense. A separate business cell phone can be fully written off.