What are the changes for Mortgage Interest Deduction?
Effective January 1, 2018, the Tax Cut and Jobs Act (TCJA) changed the mortgage interest deduction included on Schedule A. The TCJA did not change the definition of acquisition indebtedness and applies to qualifying indebtedness obtained after December 14, 2017. Deductible mortgage interest originates from acquisition indebtedness, and home equity indebtedness (that qualify as acquisition indebtedness) under $750,000 of the qualified residence(s).
Acquisition indebtedness is defined as indebtedness incurred in acquiring, constructing, or substantially improving any qualified residence and is secured by such qualifying residence.
What is a Qualified Residence?
Qualified residence means the principal residence (under IRC Section 121) and one other residence. The qualifying residence cannot be rented (or held out as a rental) during the year. The determination of a qualified residence is coordinated with the Vacation Home rules (under IRC Section 280A).
Beginning in 2018, new acquisition indebtedness is limited to $750,000 and $375,000 for married filing separately. Any mortgage interest on acquisition indebtedness over $750,000 is non-deductible. For example, if the qualified residence was purchased during 2018 for $1,000,000, only the mortgage interest calculated on $750,000 would be deductible and the mortgage interest calculated on $250,000 would be non-deductible. To calculate the deductible portion use Publication 936, Home Mortgages Interest Deduction.
Beginning in 2018, if a second qualified residence is purchased, to fully deduct the mortgage interest, all acquisition indebtedness must be less than $750,000, the second home mortgage must be secured by the second qualified residence and be eligible if other statues apply. Refer to IR-2018-32 for examples.
Acquisition indebtedness incurred prior to December 15, 2017, even if in excess of $750,000, is grandfathered and, in general, would continue to be fully deductible. Discussions of refinance transactions are outside the scope of this short discussion, look for additional posts for more in-depth discussion.
What about Home Equity?
After 2017 any home equity indebtedness that does not qualify as acquisition indebtedness is non-deductible.
The narrowing of home mortgage caps and proceeds usage has elevated the substantiation requirements for tracking the use of such funds. If you would like to discuss how changes to the mortgage interest deduction will impact you, do not hesitate to contact me.