Mortgage Interest

I want to talk about something that could seriously affect your mortgage. So if you are a homeowner, pay special attention to what I’m about to tell you.

The Tax Cuts and Jobs Acts changed how much you can deduct in mortgage interest for tax years 2018-2025.

Here’s the breakdown:

  • You no longer can deduct any interest on prior or current home equity debt, with certain exceptions.
  • The maximum amount you may treat as acquisition debt for homes purchased after December 15, 2017, is $750,000.

There is, however, an exception to this rule. Home equity loan may include acquisition or home-improvement debt, and this debt is deductible.

Let’s check out an example to help this make a little more sense.

Jason took out a $100,000 home equity loan in 2016. He used $50,000 to remodel portions of his home and used the remaining $50,000 for his daughter’s college tuition. Jason’s total home mortgages never exceeded $1.1 million. Under the new law, Jason may deduct 1/2 of his home equity loan interest in 2018.

NERD LANGUAGE: What is “Acquisition debt?” This is when you buy your main home, or a second home, and take out mortgages secured by both those homes.

Your acquisition debt does not increase when you refinance unless you use the proceeds from the refinance to improve your home.

Here’s an example.

Jerry bought a home in 2012 and took out a $500,000 mortgage that he secured with the home. In 2018, Jerry has paid down his mortgage to $400,000, and his home has increased in value to $900,000. Jerry refinances the home and takes out a new mortgage in the amount of $700,000, secured by the home.

If Jerry does NOT use any of the new money to improve his home, his mortgage interest deduction in 2018 is based on the $400,000 of mortgage principal that remained from the date he refinanced.

If you want to increase your debt eligible for the home mortgage interest deduction, you need to use the new debt to improve the home.

Make sense so far?

Keep in mind, because of tax reform, you now have two possible 2018 ceilings on your home mortgages.

$1 million. For indebtedness incurred before December 15, 2017. You can not deduct interest on more than $1 million in mortgages. The original $1 million ceiling is grandfathered for acquisition and improvement loans in existence before December 15, 2017.

$750,000. For home mortgage indebtedness incurred on or after December 15, 2017. You may not deduct interest that exceeds $750,000 on you home mortgage.

There’s another exception to the rule.

If you entered into a written, binding contract before December 15, 2017, in order to close on the purchase of a principal residence before January 1, 2018, and you complete the purchase before April 1, 2018, you fall into the $1 million ceiling category.

Make sure you keep up to date with all your mortgage expenses and your deduction could take you to the next level.