Do the New Mortgage Interest Rules Affect You?

By Rene Schaefer, CPA MST

The Tax Cuts and Jobs Act (TCJA) has significantly changed the mortgage interest rules. These changes are expected to have a tax cost of about $26 billion to individuals for 2018.

Though the mortgage interest deduction is not gone, there is confusion about the new rules and who it applies to. If you can still itemize deductions under the TCJA, you need to be aware of these new tax provisions.

What mortgage interest is deductible?

In the past, mortgage interest was deductible for home acquisition debt up to $1 million or less ($500,000 for married filing separate) on one or two homes plus home equity interest debt of up to $100,000.

Under TCJA, mortgage interest is deductible if the home acquisition debt is $750,000 or less ($375,000 for married filing separate) on one or two homes for 2018 through 2025. Debt incurred on or before December 15, 2017 is grandfathered in under the old rules for home acquisition debt of $1 million or less.

Debt will also be grandfathered in if there was a written binding contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and purchase the residence before April 1, 2018.

Home equity interest is generally no longer deductible for 2018 through 2025. There’s an exception to deduct home equity interest if the proceeds were used to buy, build or substantially improve the taxpayer’s home that secures the loan. It is still subject to the overall debt limits. Documentation and tracing will be important to determine the amount of deductible home equity interest.

How is refinancing treated?

For home acquisition debt to continue to be grandfathered under the old rules of $1 million, the refinanced debt can only be for the amount of the old mortgage debt and cannot exceed the remaining original debt term. There can be no cash taken out – even to cover closing costs –  and the term cannot be extended. Special rules apply if the original mortgage debt is not amortized over the life of the loan (i.e., has a balloon payment at the end).

For example:  A home acquisition debt was taken out in 2010 for $1 million for 30 years and the outstanding balance of $850,000 is refinanced in 2018.  The refinanced debt term can be for 22 years or less for the mortgage interest to be fully deductible under the grandfather rules.

After 2025, the old rules will apply – mortgage interest expense will be deductible for the home acquisition debt up to $1 million and home equity interest debt up to $100,000.

The new mortgage interest rules will generally apply to new home acquisition debt after December 15, 2017. These new rules may affect the Seattle/Bellevue areas more than other areas, since the average home price is well over $750,000.

It is important to know the rules before you purchase your next home or refinance your mortgage to avoid any surprises and higher taxes than expected. Please contact your Clark Nuber professional or Rene Schaefer to understand this new tax provision and how it may affect you.

© Clark Nuber PS, 2018. All Rights Reserved

 

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