If you got a mortgage on or before December 15, 2017, the new tax law doesn’t change the amount of your deductible mortgage interest.
However, if you got a mortgage (for a first or second home) after that date, effective for tax years 2018 through 2025, you can only deduct the interest you paid on the first $750,000 of the debt (amount you owe the mortgage company).
In addition, the new tax law also eliminates the deduction for interest on home equity debt.
You could deduct as an itemized deduction any interest paid on a mortgage to buy, build, or improve your principal home and a second home, if the debt totaled $1 million or less ($500,000 or less if you were married, but filed a separate tax return).
You were also allowed to deduct interest paid on home equity debt (not used to buy, build, or improve a first or second home) if the debt totaled $100,000 or less ($50,000 or less if you were married, but filed a separate tax return) and totaled no more than the fair market value of your home (reduced by the debt). Debt is the amount you owed on the home.
For mortgages entered into after December 15, 2017, the new tax law reduced the amount of interest you can deduct as an itemized deduction to the amount accruing on no more than $750,000 of debt used to buy, build, or improve your principal home and a second home ($375,000 in the case of married taxpayers filing separate tax returns) for tax years 2018 through 2025.
The debt must be secured by the specific home the debt was used to buy, build, or improve and may not exceed the value of the home. If you acquired the debt on or before December 15, 2017, the home acquisition debt limit remains at $1,000,000 ($500,000 in the case of married taxpayers filing separate tax returns).
|The new tax law also removes the deduction for interest on home equity debt for tax years 2018 through 2025. A home equity loan, home equity line of credit, or second mortgage is not home equity debt if you use the proceeds to buy, build, or improve a first or second home.|
How will this affect me?
James and Madison are married and file a joint tax return. They got a mortgage totaling $900,000 in 2016 to buy their first home. They also took out a home equity loan of $50,000 in June 2017 to build a deck and do other home improvements for their home. For their 2018 tax return, they can still claim all their interest payments for both loans as itemized deductions provided both loans are secured by the home and the total loan balance doesn’t exceed the value of the home. The new $750,000 limit doesn’t apply because both loans were taken out before December 15, 2017.
Same as above, but James and Madison use the proceeds of the $50,000 home equity loan to pay off their credit cards, student loans, and other personal expenses. The home equity loan is now home equity debt because the proceeds were not used to buy, build, or improve their home. The interest is not deductible on their 2018 tax return under the new law.
Same as above, but James and Madison got their mortgage on December 31, 2017. They’ll only be able to deduct the interest that accrues on the first $750,000 of their mortgage on their 2018 tax return.