Interest – Tax Breaks for Home Mortgage Interest

Preface: “You are not buying a house, you are buying a lifestyle.”                        -Anonymous

Interest – Tax Breaks for Home Mortgage Interest

The Trump Administration Tax Cuts and Jobs Act (Tax Cuts Act) placed new restrictions on the home mortgage interest deduction, one of the most important tax breaks available for homeowners today. Because the potential for tax savings is so great, it may be useful to review the rules. As you’ll see, they are quite complex and full of nuances as well as opportunities.

Home acquisition. Like the vast majority of Americans, you generally can fully deduct the interest paid on a loan if the proceeds are used to buy or build a residence (a main home and one vacation home). This type of financing is called acquisition debt; it can’t exceed an aggregate of $1 million for all interest to be deductible, and must be secured by your home.

Under the Tax Cuts Act, a taxpayer may treat no more than $750,000 as acquisition debt ($375,000 in the case of married taxpayers filing separately) for tax years 2018 through 2025. The reduced amounts for acquisition debt do not apply to any debt incurred on or before December 15, 2017. Therefore, a taxpayer who purchased their home on or before December 15, 2017, may continue to deduct interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return). The acquisition debt incurred on or before December 15, 2017, reduces the $750,000/$375,000 limit to any acquisition debt incurred after December 15, 2017.

Points. In general, any points you pay to the lender in the year you get a mortgage loan to buy your main residence are fully deductible. In order for points to be deductible, they must be paid from funds separate from loan principal at the time of closing. Points paid to refinance a mortgage on a principal residence are generally not deductible in the year paid and must be prorated over the period of the new loan. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Home equity loans. The Tax Cuts Act suspends the deduction for interest on home equity debt. Therefore, for tax years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity debt. However, home equity loan interest is still deductible in certain circumstances. For example, interest on a home equity loan used to build an addition to an existing home would be deductible if certain requirements are met. The suspension ends for tax years beginning after December 31, 2025.

Refinance. It may be beneficial to refinance acquisition debt for a lower rate of interest (or more favorable terms overall). The ($1million/$500,000) higher dollar limit continues to apply to any debt incurred after December 15, 2017, if it used to refinance existing acquisition debt as long as the refinancing does not exceed the amount of the refinanced debt. Therefore, the maximum dollar amount that may be treated as acquisition debt on the taxpayer’s principal residence will not decrease by reason of a refinancing. The exception for refinancing existing acquisition will not apply after:

1. 1. 1. 1. the expiration of the term of the original debt; or
         2. the earlier of the expiration of the first refinancing of the debt or 30 years after the date of the first refinancing.

Please do not hesitate to give us a call and set up an appointment to analyze your home financing situation in order to make the most of the home mortgage interest deduction.