21 Jan How much mortgage interest can I deduct on my taxes?

Q. I’m looking to purchase a home in New Jersey as my primary residence. I expect to take out a $1 million loan. I understand there is a cap on property tax deductibility, but I’m unsure how it works from an interest expense perspective. Can you explain the limits and what might be tax deductible?
— Buyer

A. We’re glad you’re asking.

It’s important to understand your tax liability before you make such an important move.

If you buy a home in 2021, you can only deduct mortgage interest expenses on $750,000 of mortgage debt, said Mary Ford, a certified public accountant with Sobel & Co. in Livingston.

She said deductible mortgage interest for the mortgage balance over the $750,000 limitation is computed as follows: Divide the maximum debt limit or 750,000 by your average mortgage balance, then multiply the result by the interest paid.

This is your allowable mortgage interest deduction amount, Ford said.

“The average mortgage balance is computed by taking the opening balance ($1 million) plus the mortgage balance at the end of the year — beginning balance less principal payments made during the tax year — divided by 2,” Ford said. “The excess mortgage interest not allowed as a deduction is treated as personal interest expense which is not deductible.”

Good luck with your home purchase.

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This story was originally published on Jan. 21, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.