What the new tax law will do to your mortgage interest deduction

What the brand new tax regulation will do to your mortgage curiosity deduction

The Tax Cuts and Jobs Act (TCJA) trimmed two necessary tax breaks for owners and left one other massive one fully untouched. In my final column, I coated how the brand new regulation can restrict itemized deductions for actual property taxes and the way it left the dear house sale achieve exclusion break untouched.

On this column, I’ll cowl how the brand new regulation limits itemized deductions for mortgage curiosity.

New limits on house mortgage curiosity deductions

For 2018-2025, the TCJA typically lets you deduct curiosity on as much as $750,000 of mortgage debt incurred to purchase or enhance a primary or second residence (so-called house acquisition debt). For many who use married submitting separate standing, the house acquisition debt restrict is $375,000.

For 2018-2025, the TCJA additionally typically eliminates the prior-law provision that allowed curiosity deductions on as much as $100,000 of house fairness debt, or $50,000 for individuals who use married submitting separate standing.

Earlier than the TCJA, you can deduct curiosity on as much as $1 million of house acquisition debt or $500,000 for individuals who use married submitting separate standing. Earlier than the TCJA, you can additionally deal with one other $100,000 of mortgage debt as house acquisition debt if the loan proceeds have been used to purchase or enhance a primary or second residence, or $50,000 for individuals who use married submitting separate standing. The extra $100,000/$50,000 of debt might be within the type of a much bigger first mortgage or a house fairness loan. So the restrict on house acquisition debt beneath prior regulation was actually $1.1 million, or $550,000 for individuals who use married submitting separate standing.

Exceptions for grandfathered money owed

Beneath a grandfather rule, the TCJA modifications don’t have an effect on house acquisition debt of as much as $1 million/$500,000 that was taken out: (1) earlier than 12/16/17 or (2) beneath a binding contract that was in impact earlier than 12/16/17, so long as the house buy closes earlier than 4/1/18. Beneath one other grandfather rule, the $1 million/$500,000 house acquisition debt limits proceed to use to house acquisition debt that was taken out earlier than the TCJA after which later — to the extent the preliminary principal steadiness of the brand new loan doesn’t exceed the principal steadiness of the previous loan on the time of the refinancing.

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Non-itemizers can ignore all this

None of this house mortgage curiosity stuff issues until you could have sufficient 2018 itemized deductions to exceed your commonplace deduction. That would be the case for fewer of us than beneath prior regulation, as a result of the TCJA virtually doubled the usual deductions for 2018 in comparison with 2017. The 2018 commonplace deduction for married joint-filing {couples} is $24,000 (in comparison with $12,700 for 2017). The 2018 commonplace deduction for heads of households is $18,000 (versus $9,350 for 2017), and the 2018 commonplace deduction for singles and people who use married submitting separate standing is $12,000 (versus $6,350 for 2017).

Some examples

If this mortgage curiosity stuff does matter to you, listed here are some examples of how the brand new TCJA mortgage curiosity deduction limits work.

Instance 1: Billy Joe and Bobby Sue are a married joint-filing couple with a $1.5 million mortgage that was taken out to purchase their principal residence in 2016. In 2017, the couple paid $60,000 of mortgage curiosity, and so they may deduct $44,000 [($1.1 million/$1.5 million) x $60,000 = $44,000].

For 2018-2025, they will apparently deal with not more than $1 million as acquisition debt. So in the event that they pay $55,000 of mortgage curiosity in 2018, they will apparently deduct solely $36,667 [($1 million/$1.5 million) x $55,000 = $36,667].

Instance 2: Similar fundamental info as above, besides this time assume that Billy Joe and Bobby Sue refinance their mortgage on 7/1/18, when it has a steadiness of $1.35 million, by taking out a brand new first mortgage for a similar quantity.

Beneath the grandfather rule for as much as $1 million of refinanced house acquisition debt, the couple can proceed to deduct the curiosity on as much as $1 million of the brand new mortgage for 2018-2025.

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Instance 3: Orlando is an single particular person with an $800,000 first mortgage that he took out to purchase his principal residence in 2012. In 2016, he opened up a house fairness line of credit score (HELOC), and borrowed $80,000 to repay his automotive loan, bank card balances, and varied different private money owed.

On his 2017 return, Orlando can deduct all of the curiosity on the primary mortgage beneath the foundations for house acquisition debt. For normal tax functions, he may deduct all of the HELOC curiosity beneath the foundations for house fairness debt (however the curiosity is disallowed beneath the choice minimal tax (AMT) guidelines as a result of the HELOC proceeds weren’t used to purchase or enhance a primary or second residence).

For 2018-2025, Orlando can proceed to deduct all of the curiosity on the primary mortgage beneath the grandfather rule for as much as $1 million of house acquisition debt, however he can’t deal with any of the HELOC curiosity as deductible house mortgage curiosity.

Instance 4: Similar fundamental info as above, besides this time assume that Orlando used the $80,000 from the HELOC to rework his principal residence.

On his 2017 return, Orlando can deduct the curiosity on the primary mortgage and the HELOC, as a result of he can deal with the mixed steadiness of the loans as house acquisition debt that doesn’t exceed $1.1 million.

For 2018-2025, Orlando can proceed to deduct the curiosity on each loans beneath the grandfather rule for as much as $1 million of house acquisition debt.

Instance 5: Paulina is an single particular person with an $800,000 first mortgage that was taken out on 12/1/17 to purchase her principal residence. In 2018, she opens up a HELOC and borrows $80,000 to rework her kitchen and loos.

For 2018-2025, Paulina can deduct all of the curiosity on the primary mortgage beneath the grandfather rule for as much as $1 million of house acquisition debt. Nonetheless, as a result of the $80,000 HELOC was taken out in 2018, the new-law $750,000 restrict on house acquisition debt apparently precludes any deductions for the HELOC curiosity. Cause: the whole $750,000 post-TCJA restrict on house acquisition debt was absorbed (after which some) by the grandfathered $800,000 first mortgage. So the HELOC steadiness apparently can’t be handled as house acquisition debt, although the entire loan proceeds have been used to enhance Paulina’s principal residence. As an alternative the HELOC steadiness should be handled as house fairness debt, and curiosity on house fairness debt is disallowed for 2018-2025.

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Instance 6: Similar fundamental info as above, besides this time assume that the primary mortgage taken out by Paulina was solely $650,000.

For 2018-2025, she will be able to deduct all of the curiosity on the primary mortgage beneath the grandfather rule for as much as $1 million of house acquisition debt. The $80,000 HELOC steadiness might be handled as house acquisition debt, as a result of the mixed steadiness of the primary mortgage and the HELOC is simply $730,000, which is beneath the post-TCJA restrict of $750,000 for house acquisition debt. So Paulina can deduct all of the curiosity on each loans beneath the foundations for house acquisition debt.

The underside line

Many householders might be blissfully unaffected by the TCJA’s new limits on deducting house mortgage curiosity. However of us with bigger mortgages and residential fairness loans should take heed. I hope the examples included right here assist make clear whether or not you may be affected and in that case, how a lot. That stated, please perceive that what you see right here relies purely on my evaluation of the relevant provisions in our beloved Inside Income Code. Subsequent IRS steerage may differ. So please keep tuned. I’ll maintain you knowledgeable of developments on this necessary tax-law entrance.