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Changes to the Mortgage Interest Deduction – How Will This Affect You?

INTRODUCTION

As a result of The Tax Cuts and Jobs Act of 2017, the largest tax reform in over 30 years, going into effect for tax year 2018 and beyond there have been many changes to individual tax laws. One set of changes that will impact millions of individual taxpayers is the new rules for deducting mortgage interest on schedule A.

This deduction has been utilized by millions of taxpayers every year and for many taxpayers it is one of the largest deductions on their tax return. The new rules apply to mortgages and home equity lines of credit (HELOC) entered after December 15, 2017. For taxpayers with existing mortgages/HELOCs who have not entered into any new loans the method and rules for deducting mortgage interest have not changed. The amount of mortgage interest on Schedule A will be the same as calculated under the old tax rules.

OLD TAX RULES

Under the old tax rules, taxpayers could deduct mortgage interest paid on up to $1,000,000 in mortgage debt and $100,000 of HELOC debt. This debt had to be secured by a qualified home, which could include either your main home or your second home. In total, mortgage interest was deductible on up to $1,100,000 of qualified debt. As previously mentioned, the old rules are preserved for mortgages entered before December 15, 2017. These mortgages are grandfathered in. This is not the case for pre-12/15/17 HELOC loans. The rules for old HELOC loans have been altered to match the new tax reform rules. See details in the section below.

NEW TAX RULES

The new tax law created some significant changes to mortgage interest deductibility. For mortgages entered on or after December 15, 2017, taxpayers may deduct the interest paid on up to $750,000 of total mortgage and HELOC indebtedness. Unlike the old law, there is no longer a separate limit for HELOC debt. All qualifying debt is considered together for purposes of the $750,000 limit. A new restriction has been added stipulating that Interest on HELOC debt is only deductible when proceeds are used to buy, build, or substantially improve the taxpayer’s home. If the loan is used for any other purpose it is no longer deductible. This includes HELOC debt obtained before December 15, 2017 as well. For example, a taxpayer obtained a home equity loan (HELOC) back in 2005 and makes regular payment on the debt through the end of 2018. If the loan proceeds back in 2005 were used to substantially improve the taxpayers home then 2018 interest is deductible. If the proceeds were used to pay down credit card debt or for some other purpose then interest is not deductible.

REFINANCING

The Tax Reform Act will also impact taxpayers who refinance mortgage debt from before December 15, 2017. If you refinance a mortgage and the result is a loan balance increase, the interest generated by the amount of the increase over $750,000 is non-deductible. The increase in mortgage debt is considered a new loan. For example, Bill obtained a mortgage on 12/1/09 for $1,100,000. On 2/15/18, the mortgage balance is $900,000 and Bill decides to refinance. The refinance amount is $950,000. Interest attributable to the $50,000 increase would be non-deductible.

IRS REVENUE PROCEDURE 2018-32 – HOME EQUITY LOANS

The IRS released Rev Proc. 2018-32 to clarify some of the questions on home equity loans and has provided several examples. See the following link:

https://www.irs.gov/pub/irs-drop/rp-18-32.pdf

STANDARD DEDUCTION

Taxpayers should also be aware that, in addition to the changes made to the mortgage interest deduction, the standard deduction for singles has increased to $12,000 and for married filing joint to $24,000 for tax year 2018 and beyond. For many taxpayers, the new standard deduction amounts and other changes may eliminate the need to itemize mortgage interest on schedule A. A recent study by the Urban Institute and Brookings Institution estimates that the number of taxpayers itemizing their deductions will drop by about 57%.

CONCLUSION

The new tax laws for deducting mortgage interest are complex with many special rules carved out for specific situations. It is going to take a couple years for everyone to fully absorb the changes and understand how they are applied. If you have questions regarding how these changes will affect your specific tax situation please contact us and we would be happy to discuss.

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