Is Mortgage Interest Still Deductible on Your Tax Return?

Currently, for the tax return you will file for 2017, the mortgage interest deduction remains unchanged. The New Tax Reform, signed into law by President Trump on December 22, 2017, changes the deduction significantly for people who have a home equity loan and/or mortgage debt above $750,000. Special rules apply to home equity loans. Although mortgage interest is still deductible on your tax return, it is reduced to mortgage interest on mortgage debt up to $750,000 ($375,000 for married filing separately).

What if you take the Standard Deduction?

Taxpayers can either take the standard or itemized deduction. The standard deduction for 2017 is $12,700 for married filing jointly filers and $6,350 for single / married filing separately filers. For taxpayers that normally take the standard deduction, which is nearly doubling for 2018, you can ignore the mortgage interest deduction.

The mortgage interest deduction only applies, if you qualify for and itemize your deductions, rather than take the standard deduction. For taxpayers, especially high-income earners, who have a lot of itemized deductions, the tax savings from itemized deductions, like the mortgage interest can lead to thousands in tax savings. If you cannot deduct more in itemized deductions than the standard deduction, than it is better to take the standard deduction.

The majority of taxpayers are eligible to take the standard deduction with a few exceptions. If you are itemizing your deductions because they provide you with a higher deduction or because you do not qualify to take the standard deduction, see below for how these changes will affect your 2017 (taxes you are filing now) and 2018 (taxes you will file in 2019) tax returns.

How Does the Mortgage Interest Deduction Work Now?

Currently, mortgage interest is deductible on mortgage debt up to $1 million for married filing jointly filers (up to $500,000 for single / married filing separately filers). Also, mortgage interest on home equity loans up to $100,000 for married filing jointly filers (up to $50,000 for single / married filing separately filers). For example, if in 2017 a married couple paid $40,000 in interest on a $1,000,000 mortgage debt and $10,000 in interest on a $100,000 home equity loan they used to improve their home, they would be able to take a $50,000 ($40,000 + $10,000) itemized mortgage interest deduction.

In the same example above, if the married couple had no other deductions to itemize (unlikely), it would still be better for them to take the mortgage interest itemized deduction for 2017, because it would net them a $37,300 greater deduction ($50,000 mortgage interest deduction - $12,700 standard deduction) than taking the standard deduction.

How is the Mortgage Interest Deduction Affected under the New Tax Reform?

Under the New Tax Reform, the mortgage interest itemized deduction, effective in 2018, is reduced to interest on mortgage debt up to $750,000 (decreased from $1 million). Using the same example above of the married couple with a $50,000 mortgage interest deduction in 2017, if they took at the same loans in May 2018 ($40,000 in interest on their $1 million mortgage and $10,000 in interest on the $100,000 home equity loan), the couple in 2018 would be able to take an itemized mortgage interest deduction of $30,000. For 2018, their mortgage interest deduction would be calculated as follows:

• $750,000 (amount of deduction allowed) / $1 million (amount of mortgage) = 75% (percentage of allowed deduction)
• $40,000 (total amount of interest) x 75% (percentage of allowed deduction) = $30,000 mortgage interest deduction

Under the New Tax Reform, their $10,000 deduction for the home equity loan has been eliminated, regardless of what they used the loan proceeds for because they have already maxed out the deduction, which leaves them with an allowed mortgage interest deduction of $30,000 off their primary mortgage debt. If the couple qualify under the grandfather rule under the New Tax Reform, discussed in more detail below, they would be able to deduct $40,000 or the interest off their $1 million mortgage debt.

Is Interest on a Home Equity Loan, Home Equity Line of Credit, or Second Mortgage Still Deductible?

Starting in 2018, if you pay interest on a home equity loan, home equity line of credit, or second mortgage, you will no longer be able to deduct the interest on the home equity loan unless the loan:

• was used “to buy, build or substantially improve the taxpayer’s home that secures the loan;”
• is secured by the taxpayer’s main home or second home (qualified residence); and
• does not exceed the cost of the home.

For 2017 and previous years, it did not matter if taxpayers used the loan proceeds to pay off credit card debt, buy a car, etc. However, for 2018 – 2026, home equity loan interest is deductible only if the loan was used to buy, build, or substantially improve the home that secures the loan. Also, for all the interest to be deductible, the combined amount of the loans must be $750,000 or less for married filing jointly filers ($375,000 or less for single / married filing separately filers).

Grandfathered Mortgage Debts

The grandfather rule under the New Tax Reform allows taxpayers to continue to deduct mortgage interest on mortgage debts up to $1 million for married filing jointly filers ($500,000 for single filers) for the primary mortgage debt used to acquire a home, if the loan was taken out either:

• By December 15, 2017; or
• Under a binding contract by December 15, 2017, providing that it closed by March 31, 2018.

Even if the loan is later refinanced, taxpayers can continue to deduct the mortgage interest up to the $1 million / $500,000, if:

• The original loan qualified (see above) to be grandfathered under the New Tax Reform; and
• The refinanced amount does not exceed the principal balance of the old loan at the time of refinancing (in other words: no cashing out).

Home equity loans will be grandfathered under the New Tax Reform as well, as long as:

• The loan was used to buy or improve a first or second residence; and
• Combined loan balance of the main mortgage debt and home equity loan are $1 million or less.

The Ultimate Outcome

Your mortgage interest is still deductible on your income tax return. The new cap will reduce the amount of mortgage interest that can be deducted to $750,000 primary mortgage debt, unless your loan(s) qualify under the grandfather rule.

To determine how this affects your tax deductions for 2018 schedule an appointment today with the tax professionals at Gudorf Tax Group.