New Limitations on Deductible Home Mortgage Interest

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Before the Tax Cuts and Jobs Act (TCJA), you could deduct interest on up to $1 million ($500,000 if married filing separately) of home acquisition debt (debt used to buy or substantially improve a first or second residence). Also, you could generally deduct another $100,000 ($50,000 if married filing separately) of home equity debt, regardless of how the proceeds were used. So, deductible interest under prior law was really limited to $1.1 million of mortgage debt, or $550,000 for those who used married filing separate status. The TCJA cuts those numbers back significantly.

New Law Alters the Playing Field for 2018–2025

For 2018–2025, the TCJA reduces the limit on home acquisition debt to $750,000. For those who use married filing separate status, the debt limit is halved to $375,000. Also, the TCJA generally disallows home equity debt interest. However, the IRS recently advised homeowners that interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. In other words, such loans will be treated as home acquisition debt subject to the new $750,000/$375,000 limits. By making this clarification, the IRS has confirmed that the actual use and substance of the loan, and not its label, is what matters.

Grandfather Rules for up to $1 Million of Home Acquisition Debt

Under one grandfather rule, the TCJA does not affect deductions for home acquisition debt of up to $1 million/$500,000 that was taken out: (1) on or before 12/15/17 or (2) under a binding contract that was in effect before 12/15/17 to close on the purchase of a principal residence before 1/1/18, as long as the residence is actually purchased before 4/1/18. Under a second grandfather rule, the prior-law $1 million/$500,000 debt limits continue to apply to home acquisition debt that was taken out on or before 12/15/17 and then refinanced later. However, this is limited to the extent the amount of the new loan does not exceed the principal balance of the old loan at the time of the refinancing. This is good news for existing homeowners.


The unfavorable TCJA changes to the home mortgage interest deduction rules will not affect all homeowners, but those with large mortgages and/or home equity loans are more likely to be affected. New homeowners who take out large mortgages to buy homes in high-cost areas also are more likely to be affected. Please contact us if you have questions or want more information about the new rules.

If you have any questions, please contact Porte Brown at 847-956-1040.

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