Deducting Interest Expenses When You File
If you pay any interest on borrowing money then you may be able to deduct this when filing your tax return. Unless the interest is on a student loan or on a rental or business property then you will generally find that is it deductible.
Our guide looks at interest deductions.
Mortgage Interest on your Home
‘Home mortgage interest’ is the interest that you pay on a loan secured against your main or second home.
Your main home is the home where you live for the majority of the time. It can be a house, condominium, house trailer, mobile home, cooperative apartment or a houseboat with cooking, toilet and sleeping facilities.
Your second home is any other property that you own which you use as your second home. You don’t have to use it during the year but if you rent it to others you must use it for at least 14 days or 10 per cent of the number of days you rent it, whichever is greater.
The loan that you use for your main or second home can be a loan to buy your home, a line of credit, a home equity loan or a second mortgage. Most home mortgage interest is reported on Form 1098 by the financial institution to which you make your payments.
If your mortgages fit into one or more of these categories at all times during the year, you can deduct the interest on the loans:
- You took out the mortgage(s) before October 13, 1987
- You took out the mortgage(s) after October 13, 1987 to build, buy or improve your home
- The mortgage(s) must not exceed $1 million (or $500,000 if your filing status is ‘married filing separately’)
- You took out the mortgage(s) after October 13, 1987 for reasons other than to build, buy or improve your home – but only if these mortgages total $100,000 or less (or $50,000 or less if your filing status is ‘married filing separately’)
If your mortgage(s) don’t fit into all of these categories you may still be able to deduct part of the interest paid.
Interest on your Investments
Investment interest is paid on any debts to purchase investment property. It includes:
- Interest derived from a trade or business in which you did not materially participate and which is not considered a passive activity
- Interest allocable to portfolio income under the PAL (Passive Activity Loss) rules
- Any deductible amount connected with personal property used in a short sale
Note that you can deduct investment interest only to the extent of your net investment income. Investment income includes:
- Income from activities in which you don’t materially participate
- Non business/trade income from royalties, rent, dividends and interest
- Net gains on the disposal of investment property
- Gross portfolio income under PAL rules
Other ‘non-deductible Interest
You cannot deduct any personal interest when you file your tax return.
Personal interest is interest paid on loans to purchase personal property. It includes interest on credit cards, car loans, instalment interest for personal expenses and other non-business related properties.
You mention that ‘unless the interest is on a student loan or on a rental or business property then you will generally find that is it deductible’. I thought you could deduct student loan interest?
Joe – thanks for your question. We’ll be looking at this in more detail in a future article but yes, interest payments made on a qualified student loan may be deductible up to a maximum amount of $2,500.