The recent tax reform contains two big changes to how much
you can deduct in mortgage interest for tax years 2018 through 2025:
- During this seven-year period, you may not deduct any interest on prior or current home equity debt, with certain exceptions.
- Also during this seven-year period, the maximum amount you may treat as acquisition debt for homes purchased after December 15, 2017, is $750,000.
Your home equity loan may include acquisition or home-improvement debt, and that
debt continues as deductible under the recent tax reform rules.
took out a $90,000 home equity loan in 2015. He used $50,000 to remodel
portions of his home and used the remaining $40,000 for his daughter’s college
tuition. Billy’s total home mortgages never exceeded $1.1 million. Under the
new law, Billy may deduct 5/9 of his home equity loan interest in 2018.
When you buy your main home or a second home and take out mortgages secured by
those homes, your mortgages are called acquisition debt. You can add
acquisition debt when you improve your main or second home, and that new debt
is secured by the home you improved.
Refinancing alert. Your
acquisition debt does not increase when you refinance unless you use the new
monies to improve the home.
Example. Tom bought
a home in 2010 and took out a $500,000 mortgage that he secured with the home. In
2018, Tom has paid down his mortgage to $430,000, and his home has increased in
value to $800,000. Tom refinances the home and takes out a new mortgage in the
amount of $600,000, secured by the home.
If Tom uses none of the new money to improve his home, his
mortgage interest deduction in 2018 is based on the $430,000 of mortgage
principal that remained as of the date of his refinancing.
To put this in perspective, your original acquisition debt
never increases on that original home. To increase your debt eligible for the
home mortgage interest deduction, you need to use the new debt to improve the
of tax reform, you now have two possible 2018 ceilings on your home mortgages
that are eligible for the mortgage interest deductions.
$1.1 million. For
indebtedness incurred before December 15, 2017, you may not deduct interest on
more than $1.1 million in mortgages ($1 million in acquisition debt and
$100,000 in home equity debt used for acquisition or improvements). The
original $1.1 million ceiling is grandfathered for acquisition and improvement loans
in existence before December 15, 2017.
Example. Sam took
out his mortgages during 2013. Sam faces the $1.1 million ceiling in 2018.
$750,000. For home
mortgage indebtedness incurred on or after December 15, 2017, you may deduct
interest on no more than $750,000 of home mortgages.
Example. Jim took
out his mortgage in 2018. He faces the $750,000 ceiling.
Exception. If you
entered into a written, binding contract before December 15, 2017, 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 $1.1 million ceiling
If you have questions regarding your interest deductions, please don’t hesitate to call me on my direct line at 909-570-1103
Carlos Samaniego, EA