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.
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.
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.
During the tax reform talks, Congress threatened to limit mortgage interest deductions to interest paid on loans for a principal residence (i.e., eliminating the deduction for interest paid for a second home). Although this restriction was excluded from the final version of the law, the TCJA cracks down on mortgage interest deductions in two other respects:
The threshold for deducting interest paid on acquisition debt is lowered to $750,000. This rule applies to loans originated after December 15, 2017 (or April 1, 2018 if there is a binding contract in place before December 16, 2017).
Any deduction for interest paid on home equity debt is suspended after 2017.
Thus, homeowners with existing mortgages are “grandfathered” under the new rules for payments on acquisition debt. They can continue to deduct mortgage interest on debt up to $1 million after 2017, even if the loan is refinanced (up to the amount of the existing debt). But the lower threshold will now apply to new borrowers. And, finally, deductions for interest paid on home equity debt are going bye-bye for all taxpayers.
In the meantime, make sure your clients claim the full amount of mortgage interest they are entitled to deduct on their 2017 return. Note that this may include a deduction for “points” paid in 2017 to obtain a favorable mortgage or a pro rata deduction for points paid on a 2017 refinancing. Instruct your clients to provide the necessary information.
This article is part of a series titled Vintage 2017 Tax Deductions, which focuses on the key deductions your clients may be able to claim under the new tax law.
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...