New Mortgage Interest Deduction

The tax overhaul contains new restrictions, both indirect and direct, on deductions. By the end of 2025, these changes expire. According to IRS, the number of tax returns with a deduction will fall to approximately 14 million in 2018 compared to 32 million in 2017. One reason for the change is that millions more filers will claim the expanded standard deduction separately from the list of write-offs in Schedule A. For example, if the of a married couple, state taxes and charitable contributions average about $18,000 per year, they have benefited from the listing of these deductions in Schedule A before the overhaul. But they won’t for 2018, because instead of taking the $24,000 standard deduction, it’s to their advantage.

Legislators have also made significant changes affecting some taxpayers who take deductions from interest. The new law allows homeowners with existing mortgages to deduct interest on a total debt of $1 million for the first and second homes. However, for new buyers, the $1 million limit for a first and second home drops to $750,000. These limits for inflation are not indexed. For example, if Joe had a of $750,000 on his first home and a of $200,000 on his second home as of December 15, 2017, he can continue to deduct interest on both on Schedule A. But if he purchased a home with a of $750,000 by that date, and then purchased a second home with a of $200,000. he couldn’t deduct interest on the second loan in 2018.

Homeowners can refinance mortgage debt of up to $1 million that existed on 15 December 2017 and still deduct interest. But often the new loan can not exceed the refinancing of the mortgage. For example, if Jane has a mortgage of $1 million she paid down to $800,000, she can refinance up to $800,000 in debt and continue to deduct interest. If she refinances $900,000 and uses $100,000 in cash to upgrade the home, she could also deduct interest on $900,000. But if Jane refinances $900,000 and just pocks $100,000 in cash, she could deduct interest on refinancing only $800,000.

Under previous law, homeowners could deduct interest on home equity debt of up to $100,000 used for any purpose. To be deductible, the loan must now be used to “buy, build or significantly improve” a first or second home. The debt must also be secured by the home to which it applies, so that a Heloc can not be used to buy or expand a second home on a first home.