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New Tax Law Cracks Down On Home Mortgage Interest



For years, taxpayers have been able to deduct home mortgage interest on their primary and second homes as an itemized deduction, subject to certain limitations. The interest deduction was limited to the interest on up to $1 million of acquisition debt and $100,000 of equity debt.

Acquisition debt is debt incurred to purchase, construct or substantially improve a taxpayer’s principal or second home. So when you purchased your home, that original loan was acquisition debt, and if you later borrowed additional money that you used to add a room, pool, etc., that loan was also acquisition debt. However, if the total of all of your acquisition loans exceeded the $1 million limit, then the interest on the excess debt over $1 million was not deductible as acquisition debt interest. 

Consumer debt interest, such as interest on auto loans and credit card debt, is not deductible as an itemized deduction. However, years ago, Congress allowed homeowners to deduct the interest on up to $100,000 of equity debt. This allowed homeowners to use the equity in their homes for any purpose and deduct the interest on the equity debt as an itemized deduction.

Well, That Has All Changed. For 2018 through 2025, the new tax law reduces the $1 million limit on home acquisition debt to $750,000 ($375,000 for married separate filers), except that the lower limit won’t apply to indebtedness incurred before December 15, 2017. That is, the $1M cap continues to apply to acquisition mortgages on primary and second residences that were already in existence prior to December 15, 2017, as well as for taxpayers who entered into a binding written contract before that date to close on the purchase of a principal residence before January 1, 2018, and who purchase that residence before April 1, 2018.

The Equity Debt Interest Deduction Is No More – Congress has yanked the rug out from under those with equity debt on their homes. Beginning in 2018, interest paid on equity debt will no longer be allowed as a deduction, regardless of when the debt was incurred.

This seems a little unfair and can have an adverse impact on individuals who used their home as a piggy bank for personal expense purposes.

Whether any of this makes any difference in light of the new higher standard deduction amounts for 2018, and whether you should be looking for ways to pay down the equity debt, will depend upon the amounts of your other itemized deductions.

Have a question? Contact Peter Flournoy. Your comments are always welcome!

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Mr. Flournoy goes beyond tax preparation to help clients plan for the future. Provides individuals and families with a variety of valuable tax planning services including income tax, retirement, gift/estate and trust planning.

With over 30 years of experience helping families and individuals minimize their tax liability and helps with all tax planning and preparation needs. He works in a primarily paperless office environment and the security of client information is his utmost priority.

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2 thoughts on “New Tax Law Cracks Down On Home Mortgage Interest

  1. Avatar James says:

    I believe you will find that interest on home equity loans is still deductible for 2018 – 2025, if the taxpayer meets certain criteria.

    See:

    https://www.washingtonpost.com/realestate/did-the-tax-code-overhaul-kill-home-equity-loans/2018/01/16/626f8054-facf-11e7-ad8c-ecbb62019393_story.html

    • Avatar Peter Flournoy says:

      James:
      You are correct that for home equity loans for which the proceeds have been used entirely for acquisition indebtedness (used to buy, improve or construct a new home). So to determine future deductibility you will need to determine how much of home equity loan proceeds have been used for acquisition debt.

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