Breaking the Code: Mortgage Interest Deduction
By: Antony T. Khalife, CPA, MST, CFP®
The Tax Cuts and Jobs Act (TCJA) has resulted in questions from taxpayers regarding many tax provisions and deductions, including home mortgage interest. We would like to summarize the main points for one of the most common deductions that taxpayers take advantage of.
Is home mortgage interest still deductible?
Yes – home mortgage interest is still deductible on your primary and secondary (vacation) homes. For all loans on home purchases made after December 14, 2017, you may only deduct the interest on loan values & debt up to $750,000, regardless of the interest rate. For all purchases prior to December 14, 2017, the interest is deductible for loans with a value of $1,000,000.
What if my loan value exceeds the allowed limitation?
If the loan value exceeds the allowed limitation, there is a formula to pro-rate the allowable interest deduction based on the total outstanding loan balance relative to the applicable loan limit. For example, if you had a loan balance of $1,500,000 for a home purchased December 20, 2017, then only 50% of the interest paid would be deductible ($750,000 limit).
If I have a home equity loan or line of credit, is that interest still deductible?
If the home equity loan or line of credit was used to “buy, build, or substantially improve” your home, then the loan would be treated similar to a traditional mortgage. The aggregate value of all loans and mortgage cannot exceed the limits referenced above, depending on when the home was purchased.
What happens if I refinance my loan after December 14, 2017?
If the original loan and home purchase was made prior to December 14, 2017, then the “old” $1,000,000 loan value still applies for any refinances to obtain a lower rate or change in term. Please note that you would not be able to obtain additional loan proceeds or “cash out” using the old limit – it would apply to your current existing loan balance only.
Is the mortgage interest limit applicable to business (rental) properties?
The limit only applies to the primary and secondary residence and does not apply to any properties used exclusively for business purposes.
The provisions of the TCJA are set to expire on December 31, 2025, including the suspension of interest paid on home equity lines or lines of credit. At that time, barring any changes, the tax laws will revert to the prior limits.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.