Tax Cuts and Jobs Act Changes the Home Mortgage and Equity Loan Interest Deduction

| 2017 Tax Reform Updates, Tax Briefs

The rules for how taxpayers deduct home mortgage and home equity lines of credit interest have changed under the new tax Act starting in 2018.

The pre-Act rules for mortgage interest deductions allowed married filing joint taxpayers to deduct interest on mortgage debt up to $1 million used for a primary residence and a second home. The limit was $500,000 for a married filing separate taxpayer. Married filing joint taxpayers were also able to deduct qualifying home equity debt limited to the lesser of $100,000 ($50,000 for married filing separate), or the taxpayers’ equity in the home or homes. The funds from the home equity loans were not limited in their use, so a taxpayer could use those funds to pay for education, healthcare, major purchase, etc.

The new tax Act, which starts in 2018, will limit the qualifying acquisition debt to $750,000 ($375,000 for married filing separate). Purchases prior to December 15, 2017 will be grandfathered in to the pre-Act limitations. The higher limits from the pre-Act rules also apply toward refinancing a home purchased prior to the December 15, 2017 cutoff. For refinancing under this scenario, the new debt cannot exceed the original debt amount.

The most significant change starting in 2018 will center on taxpayers no longer being allowed a deduction for interest on home equity debt. This change is effective regardless of when the home equity debt was incurred. This should be a factor to consider when deciding if incurring home equity debt is the best option in the future due to the loss of the itemized deduction. If you currently are deducting interest from home equity debt, be prepared to lose that deduction for 2018 through 2025.

This provision is scheduled to expire in 2026.  This means that unless Congress extends the rules, taxpayers will be able to deduct home equity debt again and the higher pre-Act limits will be reinstated.