changes to mortgage interest deduction

Tax law changes for 2018 include some new restrictions on mortgage interest deductions. These limits apply only to your personal residence and second home, not to your investment or rental properties. If you own a home or are thinking of buying one, please read on to see if you are affected by these changes. 

PREVIOUS LAW: individuals could deduct interest paid on loans of up to $1,000,000 in mortgage debt plus $100,000 of home equity debt. Home equity debt would be a Line of Credit or Loan taken to pull cash from the equity of your home before you sell it--regardless if cash is used for home improvements or not. 

NEW LAW: For loans acquired after Dec 15th, 2017, only interest paid on loans of up to $750,000 in total mortgage debt (on first and second homes combined) is deductible. Dec 15th date applies to both purchases and refinances, so this is a new consideration for someone refinancing--if your loan balances exceed $750,000. This new limit is also cut in half if you are married but filing separately.

Most people will not be affected by this change (unless you live in NYC or San Fran), but if you have mortgages on a personal home (or two) that exceed $750,000, it's important to do some tax planning to avoid a surprise at tax time. 

Contact Us if you have any questions and/or are considering refinancing a larger loan.

Often called home equity lines of credit (HELOC), second mortgages or just home equity loans, these loans can be used for a variety of reasons: pay off credit card debt, buy a boat, fill a kiddie pool with dollar bills and literally swim in your own debt, or maybe get that dream kitchen.

PREVIOUS LAW: You could deduct up to $100,000 in non-home acquisition debt, meaning regardless of what you did with the loan proceeds, you could deduct interest as Home Equity Loan Interest (on up to $100k in funds).

NEW LAW: If the debt was obtained to acquire or improve your home, no problem, that is still deductible if ALL loans are still under the new $750k debt limit above. But if loan proceeds were used for any reason other than home improvement/purchase, you can no longer deduct that interest. This limitation on Home Equity loans is for ALL loans, NOT just new loans after December 15th, 2017. So if you took out a line of credit on your house 3 years ago to pay down your student loans and remodel your bathroom, we'll need to know the breakdown on how much you used for each.

There is some good news: if you used a home equity loan to pay for a mix of house improvements and personal expenses, the IRS assumes you pay off the principal balance for personal expenses first. For example, if you took out $40,000 HELOC five years ago for a $15,000 car and $25,000 kitchen and the balance on the loan is currently under $25,000, you can deduct all the interest on the loan as the IRS will consider the car paid off and entire interest payment would be for the kitchen now.

Or not. These new rules can get complicated for some, and for others, it may not matter at all as the new standard deduction may limit your entire mortgage deduction either way.

If you either have mortgages in excess of $750,000 (on loans newer than 12/15/17) OR you've taken out cash from your home to finance anything other than home improvements and would like more specific advice, please contact us* with your specific loan details to see whether some or all of your home loan interest is affected by these new rules.