Mortgage Interest Deduction Under the New Tax Cuts and Jobs Act
February 19, 2018
Since the Tax Reform Act of 1986, the mortgage interest deduction was limited to interest on the first $1,000,000 of acquisition indebtedness. This is debt principal secured by and used to acquire, build, or substantially improve your primary and a designated secondary residence. Additionally, interest on a home equity loan of up to $100,000 was deductible regardless of how the proceeds from the loan were used. Now, beginning with all tax years after 2017, there will be new rules to the amount of mortgage interest you will be allowed to deduct.
Under the new Tax Cuts and Jobs Act, the maximum acquisition indebtedness on your primary and designated secondary residence has been reduced from $1,000,000 to $750,000 for loans acquired after December 15, 2017. The $750,000 limit only applies to new mortgages. Existing mortgages acquired prior to December 15, 2017 retain their deductibility of interest on the first $1,000,000 of acquisition Indebtedness. In addition, a refinance of a mortgage originally acquired prior to December 15, 2017 retains their deductibility of interest on the first $1,000,000 of acquisition indebtedness.
For all tax years beginning after 2017, taxpayers will no longer be able to deduct interest with respect to home equity loans if the proceeds from the loan were not used to acquire, build, or substantially improve your residence. Unlike the interest deduction for acquisition indebtedness, there is no grandfathering provision for existing home equity debt acquired prior December 15, 2017.
A key point in the tax treatment of mortgage interest is the distinction of acquisition versus home equity indebtedness. For 2018 and beyond, only interest paid on mortgage debt deemed to be acquisition indebtedness will be deductible. For example, interest from a home equity line of credit is deductible if the proceeds were used to acquire, build, or substantially improve your primary and a designated secondary residence. Interest paid on a home equity loan for any other use will no longer be deductible. Determining whether mortgage debt qualifies as acquisition indebtedness will be the key in determining whether or not your mortgage interest is deductible.
Schedule a consultation with an experienced Aprio advisor to discuss your Individual Tax needs.