The Tax Cuts and Jobs Act (TCJA), passed in December 2017, was one of the largest tax reforms in decades. Needless to say, it caused numerous changes that affects many individual taxpayers. Homeowners may notice changes to deductions related to their home mortgage interest effective for the 2018 tax year.
Before the passing of the TCJA, all homeowners got the benefit of deducting mortgage interest on up to $1,000,000 of their mortgage debt ($500,000 if married filing separately), meaning any interest paid on the first $1 million of your qualified residence loan was deductible on Schedule A of your Form 1040. The new tax laws reduce this amount to $750,000 ($375,000 if married filing separately) for homes purchased after December 15, 2017. Homeowners with mortgages that existed on or before December 14, 2017 are grandfathered into the old tax laws and are still able to deduct interest based on the $1 million limit, even if you refinance your mortgage to get a lower rate.
Home Equity Interest Deductions
The new tax laws may also affect homeowners that have home equity loans or home equity line of credits (HELOCs). Under the old tax laws, home equity interest on up to $100,000 of the home equity indebtedness was deductible, regardless of how the proceeds were used, however, the new tax laws eliminates all home equity interest unless the proceeds of the loan is used to buy, build, or substantially improve your home. These new rules apply to all home equity loans or HELOCs, regardless of when the indebtedness occurred. If you qualify for the home equity interest deduction this year be sure to retain your records relating to the home purchase or improvements.
Things to Consider
When figuring out how much home mortgage interest is deductible this year, keep in mind that the limits apply to your total qualified residence loans, including mortgages, home equity loans, and HELOCs and the loans must be secured by your primary residence or your second home.
Barring new legislation, the tax laws involving home mortgage indebtedness will revert back to its prior state in 2026.
There are special situations that can occur so if you have any questions regarding the deduction of your home mortgage interest, speak with your trusted tax advisors. As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.