Homeowners: What You Need to Know About the New Mortgage Interest Deduction

The Tax Cuts and Jobs Act of 2017 will have a significant impact on homeowners in the years to come. People who are planning to buy a new home in 2018, or borrowing from their current home, should keep these restrictions in mind.

Buying a New Home

Under the new law, in effect from 2018 through 2025, mortgage interest is still deductible but only on the first $750,000 of qualified residence loans. Since Oct 13, 1987, the mortgage interest deduction was limited to the first $1 million of qualified residence loans. For those buying homes in 2018 and before 2026, their mortgage interest deduction is limited to $750,000 of principal.

Taxpayers who are still able to deduct mortgage interest up to $1 million of principal include:

1. Those homeowners with mortgages that existed at the time of the law change;

2. Those who will be homeowners that:

  • Were in a binding contract to purchase before Dec 15, 2017, and to purchase the residence before Jan 1, 2018; and

  • The purchase of that residence occurred before April 1, 2018.

The limitations above assume a filing status other than Married Filing Separate. If you file as Married Filing Separate the new limit is $375,000 versus the previous $500,000.

The limits apply to the total outstanding principal of all loans used to buy, build, or substantially improve your principal residence and a second home. If the mortgage was incurred on or before Dec 15, 2017, and you later refinance, you will still preserve the $1 million cap.

Borrowing from Your Current Home  

Under the new law, how you intend to use the proceeds will be important. Under prior law, the first $100,000 of an equity loan (or line of credit) was deductible, no matter how the monies were used. Under the current law, unless those monies are used to buy, build, or substantially improve the principal residence or second home, the interest associated with a home equity loan or line of credit is no longer deductible. This applies to loans taken out prior to the new tax law.

With the doubling of the standard deduction, one should really pay attention to whether or not they are benefiting from the mortgage interest deduction write-off. 

If you have questions or need assistance, please contact me today!

Susan A. Moussi, CPA, CFP®, CDFA SMD Tax & Divorce Financial Planning Consultants, Inc. Phone: 614.429.4172 susan@smdtaxanddivorce.com