Is My Home Mortgage Interest Still Deductible?

You’ve probably heard that significant changes have come to the tried-and-true Schedule A itemized deductions methodology we’re all familiar with. One such modification is in the area of deductibility of mortgage, home equity loan and home equity line-of-credit (HELOC) interest. Beginning with tax year 2018 and continuing through 2025, the standard will be quite different than in the past.

To understand the changes, it makes sense to summarize the prior rules.

Mortgage interest then

For loans entered into after October 13, 1987, through December 15, 2017, homeowners were allowed to deduct interest charged on mortgages valued up to $1 million¹ on their principal or second home, as long as the debt was secured by the home(s). This was defined as “qualified residence” debt. The main restrictions on this deduction were the overall indebtedness limit and that this deduction didn’t apply to investment property, only a qualified residence.

Additionally, interest of up to $100,000 on home equity debt was eligible for a deduction, provided the fair market value of the home was more than the total of mortgage debt and home equity debt. What’s more, the home equity interest didn’t need to be tied to specific home improvements. This means, interest stemming from a home equity loan used to purchase an auto, pay college tuition or pay off credit card balances was deductible on Schedule A as long as the requirements related to debt security and fair market value were met.

Mortgage interest now

Beginning with tax year 2018, interest on loans entered into after December 15, 2017, can only be fully deductible for those mortgages with total principal of $750,000 or less. For greater amounts, interest will be deductible on a pro-rata basis.  For example, if a 2018 loan is entered into for a $1 million balance, only 75% of the interest will be deductible ($750,000 / $1,000,000). The requirement that the mortgage interest be tied to a principal residence or second home, and that the debt is secured by the home(s), is still in place.

Home equity or HELOC interest has been suspended as of that same date when total indebtedness is more than $750,000 and/or when the equity loan or line of credit isn’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. No longer, then, can a taxpayer enter into a home equity loan to pay a child’s college tuition and deduct that interest.

Mortgage interest existing as of December 15, 2017 (“grandfathered” debt)

Breathe a sigh of relief, as the new $750,000 limitation does not apply if your mortgage loan was in place prior to the changeover date. You may still deduct mortgage interest on debt up to the $1 million ceiling.

Another important point on the “grandfathered debt” is that if you refinance, you will still qualify for the old $1 million limit.

Home equity or HELOC interest for loans in place as of December 15, 2017, however, must be examined to ensure that those proceeds were used to buy, build or substantially improve your home. If they were used to pay personal debt, they’re no longer deductible for tax years 2018 through 2025, so it’s important to let your tax preparation team know how the proceeds from home equity debt were used. While Form 1098 may call it a home equity loan, it may actually be a “qualified residence loan” under the IRS definition.

With all the changes enacted by the Tax Cuts and Jobs Act, you may wish to discuss matters related to this topic – or any others – with your Schneider Downs & Co. team. Please feel free to reach out with any questions, as we are available to assist you.

¹ Dollar amounts quoted in this article relate to all taxpayer filing statuses, except for “Married Filing Separately,” which are 50% of the loan amounts reflected above.