Homeowner Tax Basics: The 1098 and What You Can Deduct

Every January, your mortgage servicer sends you (and the IRS) a small form that summarizes a big year: Form 1098, the Mortgage Interest Statement. Understanding it — and the handful of homeowner tax concepts around it — takes ten minutes and can genuinely change what you owe. One honest note before we start: we’re your mortgage broker, not your tax preparer. This is the plain-English orientation; your CPA applies it to your return.

What is Form 1098?

It reports what you paid your lender last year, most importantly:

• Mortgage interest paid — the headline number, and the basis of the mortgage interest deduction.
• Points paid — if you bought your home that year and paid discount points, they show here (points on a refinance generally don’t appear on the form — your Closing Disclosure has them); points can be deductible, sometimes all at once in a purchase year, sometimes spread over the loan.
• Property taxes disbursed from escrow — often shown on the form or year-end statement, since your servicer paid the county on your behalf.

If your loan transferred servicers mid-year, expect two 1098s — you need both, or you’ll understate your interest.

How does the mortgage interest deduction actually work?

The concept is simple: interest paid on the loan for your home can be deducted if you itemize deductions instead of taking the standard deduction. That “if” is the whole game.

• Itemize vs. standard: you take whichever is bigger. For many households, the standard deduction wins and the 1098 changes nothing; for others — bigger loans, higher interest, meaningful property taxes and other itemizables — itemizing wins clearly. Early-loan years matter here: amortization front-loads interest, so your deduction potential is largest in the first years of a mortgage.
• Limits exist. Interest is deductible on loan balances up to a federal cap, and state-and-local tax (SALT) deductions — where property taxes live — are capped too. Both caps have been changed by recent legislation, so confirm the current-year numbers with your tax pro rather than an old blog post (including this one — it’s the one part of this topic that genuinely moves).
• Home equity borrowing is conditional: interest on a HELOC or home-equity loan is generally deductible only when the money was used to buy, build, or substantially improve the home — not to consolidate cards or buy a truck. Keep records of what borrowed funds actually paid for.

What records should I keep beyond the 1098?

• Closing Disclosures from any purchase or refi — points, prepaid interest, and prorated taxes live there.
• A home-improvement receipt file. Not deductible today, but capital improvements raise your cost basis, which can shrink taxable gain when you sell. Combined with the home-sale gain exclusion (up to $250k single / $500k married-filing-jointly on a primary residence, with occupancy rules), most owners sell tax-free — but big-appreciation, long-hold, or converted-to-rental situations are exactly where the receipt file earns its keep.
• Escrow year-end statement — confirms actual property taxes paid, which is the number your return uses.

Questions worth bringing your tax pro

1. Standard vs. itemized — which wins for us this year, and by how much?
2. Did we pay points on a purchase or refi, and how should they be treated?
3. Does our HELOC/home-equity interest qualify (what did we use it for)?
4. Are we tracking basis correctly for the eventual sale?
5. Any Colorado-specific credits or exemptions we’re missing?

This guide is part of our Homeowner Library — the plain-English owner’s manual for the years after closing.

Frequently asked questions

What is Form 1098 used for? It reports mortgage interest (and often escrow-paid property taxes and points) to you and the IRS — the raw numbers behind homeowner deductions if you itemize.

Is mortgage interest always deductible? Only if you itemize and within federal loan-balance limits. Many households do better with the standard deduction — run both.

Is HELOC interest deductible? Generally only when the borrowed money bought, built, or substantially improved the home securing the loan. Document the use of funds.

I got two 1098s this year — why? Your loan changed servicers mid-year. Use both; together they show your full-year interest.

By Timothy Chase, Founder, 719 Lending — Colorado Springs mortgage broker. NMLS #868175 (Company NMLS #1601989). Equal Housing Opportunity. This article is educational only and is not financial, tax, or legal advice; program details and figures are general — confirm current. 719 Lending is not affiliated with or endorsed by any government agency. General information, not tax advice — confirm current-year rules with your tax professional. Last updated: July 2026.