Important changes to the Mortgage Interest Deduction tax rules, as of 2018

There is almost nothing about homeownership as confusing as tax issues, and the most confusing of all is the mortgage interest deduction. When can you take it? How much of a deduction are you actually going to realize?

The tax bill that was passed in December of 2017 (Tax Cuts & Jobs Act of 2017) changed the rules for how many tax aspects of homeownership had changed. Now, we’ve invited our tax expert, Valerie Adelman, who helped us understand major tax changes for homeowners from earlier this year, back to help explain the nuances of changes to the Mortgage Interest tax rules.

Valerie Adelman has over 30 years of experience in the financial services industry. She provides comprehensive financial

planning, investment management, tax preparation and divorce services. She’s both a Certified Financial Planner and an Enrolled Agent with the IRS. Her company is called Chestnut Financial, LLC, a tax and accounting firm, and she’s also a principal at Financial Asset Management Corporation. 

What is the current limit on deducting interest from mortgages and home loans?

From 2018 through 2025, the deduction that you can take for interest paid on new loans that were secured after December 15, 2017 is limited to $750,000 of qualified residence loans.  The limit is $375,000 for married individuals who file separately.

What are the limits on deducting mortgage interest for folks who got their loans before the tax law was passed?

Loans that were secured on or before December 15, 2017 are grandfathered in with a higher limit – a $1,000,000 deductible limit ($500,000 if filing married separate).

If a binding contract was in place before December 15, 2017 to purchase a principal residence before January 1, 2018, and if that purchase was completed before April 1, 2018, then one can use the $1,000,000 ($500,000) limits.  However, the additional $100,000 of home equity loan interest that was allowed prior to the new Act is now not allowed.

If a grandfathered loan is refinanced in a year after 2017 and before 2026, the higher limit still applies, but only to the portion of the original debit that is refinanced.  If fees are incorporated into the loan, those amounts are not deductible.

What is the limit for deducting home equity loans or home equity lines of credit interest?

The same limits apply to the combined amount of loans (including home equity and lines of credit) used to buy, build or substantially improve the taxpayer’s main home and second home.

The loan must be secured by the purchased residence.  A home equity loan secured by one home to purchase a second home is not permitted.

In what cases is the interest from home equity loans or home equity lines of credit interest not deductible?

If home equity loan proceeds are used for a purpose other than to buy, build or improve one’s home, the interest is not deductible.  In other words, tracing rules apply to any loan interest secured by a qualifying residence.  Calling a loan “home equity debt” is irrelevant; the use of the proceeds governs the deductibility.

What are the limits on deducting mortgage interest for folks who got their loans before the tax law was passed?

Loans obtained on or before December 15, 2017 are grandfathered and still have a $1,000,000 deductible limit ($500,000 if filing married separate).  If a binding contract was in place before 12/15/17 to purchase a principal residence before 1/1/18 and if that residence was purchased before 4/1/18, then one can use the $1,000,000 ($500,000) limits.  The additional $100,000 of home equity loan interest that was allowed prior to the new act is now not allowed.

If a grandfathered loan is refinanced in a year after 2017 and before 2026, the higher limit still applies, but only to the portion of the original debit that is refinanced.  If fees are incorporated into the loan, those amounts are not deductible.

What about mortgage interest premiums? Are homeowners able to deduct those still?

The deductibility of mortgage interest premiums has expired.