Mortgage Interest Tax Law Changes

190214-F-OI210-0001

The tax year 2018 saw sweeping reform as a result of the Tax Cuts and Jobs Act of 2017, which eliminated many past deduction opportunities. Such past deductions which were eliminated include the $1 million mortgage interest deduction and the unrestricted deduction for home equity loan interest.

Qualified Residence Loans

Before the 2017 Tax Cuts and Jobs Act, home equity loans had deductible interest for loans up to $100K   and the proceeds could be used for any purpose. This was because home equity loans were considered a separate category from Qualified Residence Loans.  A “Qualified Residence Loan” does not exceed the home’s value, is secured by the home, and must be used to improve, buy, or build a primary or secondary residence. After the tax reform, all home equity loans are considered a sub-category of Qualified Residence Loans and are now limited by those same restrictions. However, the previous rules still apply for loans secured prior to December 15, 2017.

Not all is lost, though. Interest on a Qualified Residence Loan can still be deducted as long as you are a qualified homeowner with secured debt on the home, itemize your deductions, and file taxes on Form 1040. The same applies when there are multiple owners. However, interest from mortgage payments for someone else’s home loan can’t be deducted from your income taxes. You must legally qualify as an owner of the property.

New Limits

From the year 2018 to 2025, the mortgage loan limits for deductible interest will be $750k for married filers and $375k for individuals. This means that the combination of your first mortgage and any home equity loans cannot have a total greater than $750K or $375K. This is down from $1M/$500K before the 2017 reform. For state and local real property taxes and income taxes combined, no more than a $10K deduction for married filers and a $5K deduction for individuals can be made.

Standard Tax Deduction

The Tax Cuts and Jobs Act of 2017 greatly increased the standard tax deduction, which you would claim if your itemized write-offs add up to less than the standard. Only the itemized deductions that exceed the standard can be written off as a tax cut. Now that many of the previous deduction opportunities have been eliminated, deductions over and above the standard have become more difficult to achieve.

Tax Benefits of Home Ownership

Home ownership still can have significant tax benefits after the passage of the recent reform. Taxes can be deducted on home-sale profit of up to $500K for married filers and up to $250K for individuals if one qualifies for the principal residence gain exclusion break.