Among many other changes, the Tax Cuts and Jobs Act (TCJA) removed several tax breaks for individuals, including the mortgage interest deduction. But the fallout is not as severe as it first appears.
Most taxpayers can continue to deduct most, if not all, of the mortgage interest they pay during the year. Additionally, the TCJA’s crackdown applies to deductions claimed from 2018 through 2025.
Background: Before the TCA, you could deduct interest paid on (1) acquisition debt or (2) home equity debt, or both, within generous limits.
- Acquisition debt: Acquisition debt is debt where you use mortgage proceeds to buy, build, or significantly improve the home. Typically, this is the largest portion of a mortgage interest deduction. To qualify for forgiveness, the loan must be secured by a qualifying residence, such as your primary residence or a secondary residence. Interest is deductible on loans up to $1 million.
- Home Equity Debt: Previously, you could deduct interest on home loans secured by qualified residence, regardless of the use of the proceeds. With home equity debt, deductions were limited to interest paid on the first $100,000 of debt. Also, the loan amount cannot exceed the equity in your home.
In addition, certain deductions, including that of mortgage interest, have been reduced for high-income taxpayers under the “Pease rule”.
Of course, the mortgage interest deduction is only available if you itemize. The TCJA has temporarily increased the standard deduction so that more taxpayers go this route.
The TCJA includes the following changes regarding mortgage interest deductions.
- The threshold for deducting interest paid on acquisition debt increases from $1 million to $750,000 for loans entered into after December 15, 2017 (or April 1, 2018 if there was a binding contract in place before December 16). 2017). Thus, some existing owners are grandfathered under the old acquisition debt rules. If you qualify, you can still deduct all qualifying mortgage interest up to the $1 million threshold.
- The deduction of interest paid on the equity in the property is suspended from 2018 to 2025. It does not matter when the residence was acquired.
- The Pease rule is also suspended from 2018 to 2025. It is expected to return in 2026, barring new legislation.
Fortunately, the TCJA changes don’t bother many owners, while others are only slightly affected. Plus, you may be able to take advantage of a special tax benefit
How it works: If you take out a new home equity loan or line of credit and use the proceeds for major home improvements, the debt may be treated as acquisition debt rather than home equity debt. the property. Reason: The debt is incurred to “substantially improve” a qualifying residence. So you can add this mortgage interest to your deductible total if you itemize the deductions further.
It is important that retailers maximize their mortgage interest deduction under current tax rules. This is often one of the biggest deductions on Form 1040 for landlords. Plan accordingly.