Can I still deduct home mortgage and home equity interest on my tax return?


Deduction for home mortgage and home equity interest modified.

Your deduction for mortgage interest is limited to interest you paid on a loan secured by your main home or second home that you used to buy, build, or substantially improve your main home or second home.

THIS MEANS THAT…if you do itemize… that interest paid on most home equity loans is not deductible unless the loan proceeds were used to buy, build, or substantially improve your main home or second home.

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

New dollar limit on total qualified residence loan balance.

The date you took out your mortgage or home equity loan may also impact the amount of interest you can deduct. If your loan was originated or treated as originating on or before Dec. 15, 2017, you may deduct interest on up to $1,000,000 ($500,000 if you are married filing separately) in qualifying debt. If your loan originated after that date, you may only deduct interest on up to $750,000 ($375,000 if you are married filing separately) in
qualifying debt. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

THIS MEANS THAT…if you do itemize…for existing mortgages, you can continue to deduct interest on a total of $1 million in qualifying debt secured by first and second homes but for new homeowners buying in 2018, you can only deduct interest on a total of $750,000 in qualifying debt for a first and second home.

The following examples illustrate these points.

Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

Example 2: In January 2017, a taxpayer takes out a mortgage to purchase a main home with a fair market value of $1.2 million. The loan is secured by the main home. In January 2018, the taxpayer takes out a $100,000 home equity loan when the balance of the first mortgage was $900,000. The taxpayer may deduct all of the interest from the first loan because the first loan was originated on or before Dec. 15, 2017. The taxpayer can deduct none of the interest on the home equity loan because the $750,000 limitation applicable to the home equity loan must be reduced (but not below zero) by the amount of the indebtedness incurred on or before December 15, 2017.

Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Example 4: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible.

Special rules apply to maintain these limits if you refinance your debt. For more information, see the 2018 Publication 936, Home Mortgage Interest Deduction.

Do you Have a Federal Tax Problem You Need Help With?

The Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic can consult with you to provide advice regarding your IRS tax problem, and/or potentially act on your behalf for FREE if you qualify for assistance (come to a clinic intake session)!

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Jim Floyd is the Staff Enrolled Agent at the Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic. As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.

Jim is also a member of The American Society of Tax Problem Solvers (ASTPS), a non-profit professional association of practitioners that specialize in representing taxpayers before the IRS and other taxing authorities. Membership in ASTPS reflects commitment to excellence and high standards in taxpayer representation

 

Source: Internal Revenue Service