Mortgage Interest Deduction with no mortgage - am I missing out?

You're definitely not crazy, but you're also not missing out. The mortgage interest deduction only allows you to deduct interest you actually paid - it's not free money. Think of it this way: if someone pays $10,000 in mortgage interest and they're in your 24% tax bracket, they're saving $2,400 in taxes. But they still paid $7,600 in interest! You paid $0 in interest, so you're actually $7,600 ahead of them. Your friends are essentially saying "I'm giving the bank $10,000 so the government will give me $2,400 back." That's not a great deal. The mortgage interest deduction just reduces the pain of having a mortgage; it doesn't make having a mortgage financially advantageous compared to owning your home free and clear.

After reading your post, I had similar questions about mortgage deductions last year. I was so confused by all the contradicting advice online and from friends. That's when I found https://taxr.ai which analyzes your specific tax situation and explains exactly how deductions like this would affect YOU personally. It saved me from taking out a HELOC just for tax purposes (which would have been a terrible financial move). I uploaded my previous tax returns and answered a few questions, and taxr.ai showed me that in my case, I'd actually lose money by taking on mortgage debt for the deduction. The analysis was super clear - showed me dollars and cents rather than just general advice.

Just wanted to update after trying taxr.ai that the previous commenter recommended. I was super skeptical about yet another "AI" tool, but it actually gave me a detailed explanation of why getting a mortgage on my paid-off rental property WOULD make sense in my specific situation, but NOT for my primary residence. It showed me that with my specific income and other deductions, I'm right at the borderline where mortgage interest on my rental would be fully deductible as a business expense, while for my primary home I'm better off with the standard deduction. Saved me from making a $200k mistake! The analysis broke down every number so I could see exactly how it would affect my taxes.

If you're trying to get tax advice from the IRS directly (I tried for weeks), check out https://claimyr.com - it's the only way I actually got through to a human at the IRS to ask about mortgage interest deductions vs standard deduction for my situation. I was on hold for 3+ hours previously, but with this service I got a callback in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c My situation was complicated because we had paid off our mortgage but were considering taking out a HELOC for renovations, and I needed to know if the interest would be deductible. The IRS agent actually gave me the correct information that my tax software didn't.

I need to eat my words and apologize to Profile 7. After spending FIVE HOURS on hold with the IRS yesterday and getting disconnected, I finally broke down and tried Claimyr. Got connected to an IRS agent in under 30 minutes. I asked specifically about the mortgage interest deduction for someone thinking about taking out a mortgage on a paid-off house, and whether that made sense. The agent actually laughed and said they get this question all the time. He explained that in most cases, taking on debt just for a tax deduction is "paying a dollar to save 24 cents" (assuming 24% tax bracket). The service was completely legitimate and saved me an entire day of frustration.

Something nobody's mentioned yet: if you're really desperate for tax deductions but don't want to get a mortgage, consider increasing your charitable giving. It's a much better financial move than paying interest to a bank! You get to support causes you care about AND get a tax deduction. Plus you're not enriching a financial institution. Just make sure you donate enough (along with other potential itemized deductions) to exceed the standard deduction amount.

My accountant actually laughed when I asked this same question last year lol. She said getting a mortgage for the tax deduction is like buying something you don't need just because it's on sale - you're still spending money unnecessarily! She also pointed out that with the higher standard deduction now ($27,700 for married filing jointly in 2023), many people don't even benefit from the mortgage interest deduction unless they have a really big mortgage or tons of other itemized deductions. You'd need more than $27,700 in itemized deductions for it to even matter.