Mortgage Interest Deduction: Cross-Border Between Canada and the US

The mortgage interest deduction is one of the biggest tax differences between the US and Canada. In the US, mortgage interest on your principal residence and one additional home is deductible if you itemize (up to $750,000 of acquisition debt). In Canada, mortgage interest on your principal residence is not deductible at all. For a cross-border filer who owns a home in the US, the deduction can significantly reduce the US tax bill, but it also affects the foreign tax credit calculation because deductions reduce the effective US tax rate.

How does the US mortgage interest deduction work?

The US mortgage interest deduction is an itemized deduction on Schedule A. To benefit from it, your total itemized deductions must exceed the standard deduction ($14,600 for single filers, $29,200 for married filing jointly in 2024).

Key rules:

• Acquisition debt limit. Interest on the first $750,000 of mortgage debt used to acquire, build, or substantially improve the home is deductible. Mortgages taken out before December 16, 2017 are grandfathered at the prior $1,000,000 limit.
• Home equity debt. Interest on home equity loans or lines of credit is deductible only if the proceeds are used to buy, build, or substantially improve the home. Interest on a HELOC used for debt consolidation, tuition, or other purposes is not deductible (this changed under the Tax Cuts and Jobs Act of 2017).
• Two homes maximum. You can deduct interest on your principal residence and one additional “qualified residence” (a second home, vacation home, or boat that qualifies as a dwelling).
• Property tax deduction. The SALT cap limits the combined deduction for state and local taxes (income tax or sales tax, plus property tax) to $10,000 ($5,000 for MFS). This does not affect the mortgage interest deduction, which has its own limit.

For a US citizen living in Canada, the mortgage interest deduction applies to a US home they own (even if it is rented out part of the year, as long as it is a “qualified residence”). If the US citizen lives in Canada and owns a Canadian home, the mortgage interest on the Canadian home is deductible on the US return (because the qualified residence can be in any country), but the deduction is taken in USD based on the exchange rate.

Why does Canada not allow a mortgage interest deduction?

Canada’s tax system does not provide a deduction for interest on personal debt, including mortgages on a principal residence. The policy rationale is that personal interest is a personal expense, not an expense incurred to earn income.

• The exception is the Smith Manoeuvre, a strategy where a homeowner borrows against their home equity and invests the borrowed funds in income-producing investments. In that case, the interest on the borrowed portion is deductible under ITA 20(1)(c) because the purpose of the borrowing is to earn income (not to buy the house). The mortgage interest on the original home purchase remains non-deductible.
• For cross-border filers, this creates an asymmetry: the same mortgage payment generates a deduction on the US return and no deduction on the Canadian return. This affects the FTC calculation because the US tax (after the deduction) is lower relative to the Canadian tax (without the deduction), which can create excess Canadian FTC.

How does the mortgage interest deduction affect the FTC?

The foreign tax credit on Form 1116 limits the credit to the ratio of foreign-source income to worldwide income, multiplied by the US tax. The mortgage interest deduction reduces the US tax, which reduces the FTC limit.

For a Canadian resident who is a US citizen:

• Canadian tax is calculated without a mortgage interest deduction (higher Canadian tax).
• US tax is calculated with the deduction (lower US tax).
• The FTC limit on the US return may be lower than the Canadian tax actually paid, creating excess FTC that carries forward.

This is not necessarily a problem: the excess FTC carries forward for 10 years and can be used in a year when the US tax exceeds the FTC limit (for example, a year when you have US-source income or capital gains that are not offset by the deduction).

What about mortgage interest on a rental property?

If the property is rented out (rather than used as a personal residence), the rules change in both countries:

• US. Mortgage interest on a rental property is deductible as a business expense on Schedule E, not as an itemized deduction on Schedule A. The $750,000 limit does not apply to rental property. The interest reduces rental income (and can create a rental loss, subject to the passive activity loss rules under IRC 469).
• Canada. Mortgage interest on a Canadian rental property is deductible as a carrying charge against rental income. The interest is reported on the T776 (Statement of Real Estate Rentals). If the property generates a net rental loss (after interest), the loss can offset other income.
• For a cross-border filer who owns a rental property in the other country, the mortgage interest deduction is available on both returns (for the rental property), and the FTC coordinates the tax between the two countries.

What about the home office deduction?

If you use a portion of your home for business (a dedicated room for self-employment income, for example), the mortgage interest attributable to the business-use portion may be deductible:

• US. The home office deduction allows self-employed individuals to deduct the business-use percentage of mortgage interest, property tax, utilities, and insurance. The simplified method allows $5 per square foot (up to 300 square feet). W-2 employees cannot deduct home office expenses on their federal return (the TCJA suspended the employee business expense deduction through 2025).
• Canada. Employees and self-employed individuals can deduct the business-use percentage of home expenses, but the deduction cannot create a loss (it is limited to the income from the home-based activity).

What should I do next?

If you own property on both sides of the border, map which deductions are available on which return. The US mortgage interest deduction (on a principal residence) is often the single largest itemized deduction for cross-border filers. If you are choosing between itemizing and taking the standard deduction on the US return, the mortgage interest is usually the factor that tips the decision.

• Cross-border rental income, the rental property rules in both countries
• Home office deduction cross-border, the business-use portion of home expenses
• Form 1116 and the FTC, how deductions affect the credit limitation
• Canadian buying US property, the full tax picture for a Canadian purchasing a US home
• Cross-border home sale exclusion, when you sell the home

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.