Are you ready to take that big step to make a house your home sweet home? With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the 2018 tax year will be reflective of the significant changes made to the home mortgage interest deduction. The two major components of this deduction are interest on home acquisition debt and interest on home equity debt. Let’s take a look at some of the differences we will expect to see this filing season.
The IRS defines home mortgage interest as any interest you pay on a loan secured by your home (main home or a second home) and it may be a mortgage used to buy your home, a second mortgage, a line of credit, or a home equity loan.
The home mortgage interest deduction is only eligible for taxpayers who itemize their deductions. A few changes have been made to itemized deductions that might qualify you to take the standard deduction over itemizing deductions in the 2018 tax year. The home mortgage interest deduction is just one piece of the tax puzzle that we hope to clarify for you and your family this upcoming tax year.
Interest on Home Acquisition Debt
The IRS defines home acquisition debt as debt to acquire, construct, or substantially improve a residence. The 2017 tax law states that the interest on the first $1 million of home acquisition debt can be deducted. The TCJA lowers the deductible amount to $750,000 for single and joint filers for the tax years 2018-2025. In addition, the deduction for married filing separately has been reduced from $500,000 to $375,000. The exceptions to these thresholds are for interest paid on debt acquired before December 16, 2017. Debt acquired before that date will still continue to have the $1 million deduction limitation.
Interest on Home Equity Debt
According to the IRS, home equity debt is any debt secured by a qualified residence that is not acquisition debt. For the 2017 tax year, deductions were available on the first $100,000 for single filers and married filing jointly and on the first $50,000 for married filing separately. The TCJA suspended the interest deduction on home equity debt if it is related to personal expenses, such as car loans and credit cards, which is not an uncommon use by taxpayers.
You might be thinking, “Doesn’t that mean the deduction on home equity interest has been fully eliminated?” The answer is: not exactly. The deduction still exists if the home equity debt is used to buy, build, or substantially improve your home, which is, in essence, the definition of home acquisition debt. Because the TCJA has kept the interest deduction on home equity debt, taxpayers may still have two opportunities to deduct home mortgage interest on their tax returns.
Tax professionals are gearing up for the 2018 tax season that will be full of reform and change. If you are thinking about buying a home or taking out a home equity loan, it is important to be aware of these new limitations on the home mortgage interest deduction. If you have any questions regarding these changes or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.