Take the Full Deduction on Mortgage Interest Ahead of the New Tax Law

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The new tax law — the Tax Cuts and Jobs Act (TCJA) — preserves the deduction for mortgage interest, with certain modifications, beginning in 2018. But the deduction is still claimed on 2017 returns under prior rules.

For some taxpayers, this may be the last time they are entitled to a full deduction, while new borrowers will face another obstacle and some other debtors may even come up empty.

First, let’s cover the basic ground rules for deducting mortgage interest on a 2017 return. There are two main limits for mortgage interest deductions under prior law.

  1. Acquisition debt: This is a debt where you used the mortgage proceeds to buy, build or substantially renovate a home. Typically, acquisition debt represents the main part of a mortgage interest deduction. To qualify for a deduction, the loan must be secured by a qualified residence, such as your principal residence or a second home, like a vacation home. In this case, interest is deductible on loans up to $1 million.
  2. Home equity debt: Assuming it is allowed under state law, you also may deduct the interest on home equity loans secured by a qualified residence, regardless of how you use the proceeds. With a home equity debt, deductions are limited to interest paid on the first $100,000 of debt. In addition, the loan amount can‘t exceed your equity in the home.

Mortgage interest deductions are claimed as itemized deductions on Schedule A of 2017 Form 1040 (subject to the Pease rule reducing itemized deductions for certain upper-income taxpayers). The deduction is allowed only if you’re an owner of the home and actually pay the interest.

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About Ken Berry

Ken Berry

Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.           

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Jan 31st 2018 18:09

What about when a client long ago had a first mortgage and a second as the original acquistion debt. The combined balances were less that $1,000,000. Would the interest on the second mortgage still be deductible in 2018 as acquistion debt or is the interest on all second mortgages / Equity Lines no longer deductible?

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