Does the Tax Cuts and Jobs Act (“TCJA”) retain the home mortgage interest deduction? Yes, with modifications. Read on to see how your individual situation will change under the TCJA.

What counts as mortgage interest?

Mortgage interest is any interest you pay on a loan for your main home or second home. These loans include:

• A mortgage to buy your home
• A second mortgage
• A line of credit
• A home equity loan

What is the home mortgage interest deduction?

Under prior law, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principle residence and a second home (acquisition debt). For married taxpayers filing separately the limit was $500,000. You could also deduct interest on other debt secured by the qualifying homes, i.e., home equity debt (limited to the lesser of $100,000) or the taxpayer’s equity in the home(s).

Changes under the TCJA

1. Starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 for married filing jointly, and $375,000 for married filing separately.
   
   Do the pre-Act rules apply to any previous debt?
   
   Yes, for acquisition debt incurred before December 15th, 2017 the higher pre-Act limit ($1 million) applies. It also would apply to debt arising from refinancing pre-December 15th acquisition debt. Essentially you can refinance up to $1 million of “pre-December 15” acquisition debt in the future without worrying about being subject to the reduced limit.
   
2. Also, starting in 2018, the deduction for interest on home equity debt is available only if the loan was used for home improvements. If the home equity loan is used to pay off credit card debt, you cannot claim the deduction.
   
   It does not matter when the home equity debt was incurred. If you currently have outstanding home equity debt, be aware that you could lose the interest deduction starting in 2018 depending on how you spent the money.

Is there a mortgage interest limitation on a rental property?

No, the limit does not apply to rental activity. The limitation only impacts primary or secondary homes.

How long will these changes last?

The changes will be effective until 2025. The pre-Act rules are scheduled to come back into effect in 2026.

For a comprehensive guide on all changes under the TCJA, listen to our recent webinar recording, “The Impact of Tax Reform on Businesses & Individuals” and feel free to reach out to us for assistance in applying these changes.