Modifications to Home Mortgage Interest Deduction

By Bonnie Scotella, CPA, MST – Senior Manager, Doeren Mayhew

Taking a mortgage interest deduction at tax time has long been a perk of homeownership, and still may be for many Americans even with the recent changes from the Tax Cuts and Jobs Act of 2017. Stated by the Tax Foundation as the third-most popular itemized deduction in the nation, the mortgage interest deduction remains in place; however with some modifications. Outlined below are some areas impacted by the modifications.

New Debt

The home mortgage interest deduction is limited to interest on up to $750,000 ($375,000 for married filing separately) of acquisition indebtedness for tax years beginning in 2018 and loans incurred on or after Dec. 15, 2017 (subject to a binding contract exception). This provision expires for tax years after 2025.

The binding contract exception allows taxpayers who entered into a written binding contract before Dec. 15, 2017, to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before April 1, 2018, to qualify under the grandfathered debt rule below.

Grandfathered Debt

Acquisition indebtedness incurred prior to Dec. 15, 2017 (grandfathered debt) is limited to interest on up to $1,000,000 ($500,000 for married filing separately). This limitation continues to apply to existing debt and existing debt that is refinanced to the extent the refinanced amount does not exceed the prior balance.

Example:  A taxpayer incurs $1,000,000 of acquisition indebtedness prior to Dec. 15, 2017 and pays down the debt to $900,000. The taxpayer may refinance the $900,000 debt after Dec. 15, 2017 and qualify for the home mortgage deduction.

To help clarify, acquisition indebtedness is indebtedness that is incurred in acquiring, constructing or substantially improving a qualified residence of the taxpayer and which is secured by the residence. A qualified residence means the taxpayer’s principal residence and one other residence of the taxpayer.

Home Equity Debt

The deduction for all home equity debt is suspended for tax years 2018 – 2025.  There is no grandfathering for existing home equity indebtedness. Home equity indebtedness is indebtedness (other than acquisition indebtedness) secured by a qualified residence. The aggregate amount treated as home equity indebtedness shall not exceed $100,000 ($50,000 for married filing separately) and other potential limitations.

If you would like to find out how the new rules to the home interest mortgage deduction apply to your specific situation, contact a tax advisor at Doeren Mayhew.

Want to reach the author? Email Bonnie Scotella or contact her at 248.244.3212.