Mortgage Interest Deduction

Thinking of buying a home or refinancing before mortgage interest rates shoot up even higher? You can still deduct mortgage interest on Schedule A of your 1040 if you itemize deductions.

But the new tax law cut back the break in some cases, depending on the size of the loan, date of the loan and how you use the loan proceeds. We’ll turn now to some of the changes.

Interest can be deducted on up to $750,000 of total home acquisition debt…indebtedness that is secured by your primary home or a single secondary home and that is incurred to buy, construct or substantially improve the residence. Before tax reform, interest could be deducted on up to $1 million of mortgage debt.

The $750,000 limit generally applies to debt incurred after December 15, 2017. Older home mortgage loans are grandfathered in and get the $1 million cap. Ditto for refinancing of pre- December 16, 2017 debt…up to the old loan amount. The $1 million debt limit also applies to home buyers who had a binding contract to purchase a house before December 15, 2017, and who closed on it by March 31, 2018.

The treatment of interest on home equity and refinance payout loans is tricky. Before 2018, you could use cash from these loans to pay off credit card debt, buy a car or take a trip, and deduct interest on up to $100,000 of the debt. Those days are gone for both existing and new home-related debt, thanks to tax reform. This crackdown doesn’t apply to home equity loans or payouts secured by a first or second residence and used to buy, build or substantially improve a home. Debt used for these purposes has always been considered acquisition indebtedness. Improvements are substantial if they add value to the home, extend the residence’s useful life or create new uses for the home. Additions and renovations count…basic repairs and maintenance don’t.

One thing that hasn’t changed: The rules for deducting points. Points paid on loans to buy, build or improve your primary home are still generally deductible in the year you pay them. If you’re refinancing, you’ll have to deduct points ratably over the life of the loan. If you sell your home, you can deduct any remaining points in the year of sale. You get a break if you refinance again. The later refinancing triggers the write-off of the balance of the points from your first refinancing, usually. But, if you refinance with the same lender, you add points on the latest refinancing to leftover points from the first deal and take the amount over the term of the new loan.

The fate of the deduction for mortgage insurance premiums is up in the air. The write-off was first set to die off over a decade ago, but Congress kept reviving it. Most recently, it was retroactively resurrected in February 2018, but only for 2017 returns. There’s bipartisan support to extend this break for 2018. But time is running out for passage this year, especially with the government shutdown.

 

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