Expertise Beyond the Numbers

New Rules for Deducting Home Mortgage Interest

The next blog post in our “2018 Tax Roadmap” series to help you navigate the Tax Cuts & Jobs Act (TCJA) reviews the new rules for deducting home mortgage interest.

Many of the changes under the TCJA will affect individual households, including several changes in the rules for deducting interest on your home mortgage.

Under the pre-Act rules, you could deduct interest up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home, i.e., acquisition debt. For a married taxpayer filing separately, the limit was $500,000.

You could also deduct interest on home equity debt, i.e., debt secured by the qualifying homes. Qualifying home equity debt was limited to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home or homes (the excess of the value of the home over the acquisition debt). The funds obtained via a home equity loan did not have to be used to acquire or improve the homes, so, you could use home equity debt to pay for education, travel, health care, etc.

Starting in 2018 under the TCJA, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). However, this limit applies only to new mortgages taken out after Dec. 15, 2017.

For acquisition debt incurred before Dec. 15, 2017, the higher pre-Act limit of $1 million applies ($500,000 for a married taxpayer filing separately). This special grandfathering rule extends to taxpayers who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchase that residence before Apr. 1, 2018.

The higher pre-Act limit also applies to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. This means you can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt in the future and not be subject to the reduced limitation.

And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take this factor into consideration. If you currently have outstanding home equity debt, be prepared to lose the interest deduction for it, starting in 2018. (You will still be able to deduct it on your 2017 tax return, filed in 2018.)

Keep in mind that the manner in which you use the loan proceeds determines if the mortgage is considered acquisition debt or home equity debt.

Qualifying acquisition debt is defined as mortgage proceeds used to buy, build, or substantially improve a qualified residence, and is secured by that residence. Home equity debt is also secured by the residence, but may be used for other purposes, such as re-allocating or consolidating debt. Therefore, a home equity loan that was used to make substantial improvements on the residence would be considered acquisition debt, and would be deductible under the new law.

Lastly, both of these changes last for eight years, through 2025. In 2026, the pre-Act rules come back into effect. So beginning in 2026, interest on home equity loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

Do you have questions on qualifying home mortgage debt, or need assistance assessing the impact of the TCJA? Please contact us if you have any questions as you navigate 2018 tax planning.