CPA-Tax Advise-JupiterFL
By: Glenn Schanel, CPA
on November 9, 2018

Prior to the Tax Cuts and Jobs Act, taxpayers could deduct interest on mortgage loans up to $1 million as long as the proceeds were used for the purchase of a first or second home. Interest on another $100,000 of home equity debt could also be deducted as long as the proceeds were used to buy or substantially improve a first or second home. This meant homeowners could potentially deduct interest on up to $1.1 million of total debt.  But the Tax Cuts and Jobs Act passed in 2017 limits the mortgage interest deduction to only the interest on the first $750,000 for joint filers and $375,000 for all other filers.

Home equity loan interest still deductible, but rules apply

Interest on home equity loans will still be deductible, provided the total debt is under the limit of $750,000 and the proceeds were used to buy or improve the home that secures the loan. Therefore, home equity loans used to pay personal expenses such as credit cards or student loans, or to purchase a vacation home, are no longer deductible.

Existing loans will be grandfathered in

Fortunately, there is a grandfather provision that allows existing mortgages as of December 15, 2017, to retain the $1,000,000 debt limit. Plus, any homes that were under contract as of December 15, 2017, for purchase by January 1st of 2018, and actually close by April 1st, are also grandfathered in.  And if you refinance a loan, you’ll still be able to deduct the interest as long as the new loan isn’t bigger than the original loan.

Given all these moving parts, let’s look at a few examples to see how this new law works.

Example 1: John and Stacy bought a home in 2010, and the current balance on their mortgage is $450,000. In 2018, they decide to buy a vacation home and take out a mortgage for $300,000. Since the total of their two loans is $750,000, they’ll be able to deduct all the interest on both mortgages.

Example 2: Same as above, but the mortgage on their second home is for $500,000. Since the total is over $750,000, their mortgage interest deduction will be limited.

Example 3: Same as Example 1, but they take out a home equity loan secured by their first home to buy the vacation home. They won’t be able to deduct any of the interest on the home equity loan because the proceeds were not used to buy build or improve the home that the loan is secured by.

Example 4: Shelly and George bought a house in 2015, and the current balance on their mortgage is $800,000. Since the original mortgage originated prior to December 16, 2017, they can still deduct all of their interest.

Example 5: Shelly and George decide to refinance their mortgage with a new $900,000 mortgage. Because the “refi” is higher than the original mortgage, their mortgage interest deduction will be limited.

Example 6: Shelly and George buy a vacation home in 2018 for $200,000. Since the mortgage on their first home was taken out before December 16, 2017, they can still deduct all the interest on the $800,000 balance. But their new vacation home will put them over the $750,000 limit, and their mortgage interest deduction will be limited.

As you can see, the rules for deducting mortgage interest are more complex now, with separate limits for new and old mortgages and home equity loans. If you’re considering the purchase of a vacation home, or need help navigating these new laws, please call our office so we can help.

 



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