Significant changes were made to the mortgage interest deduction in the Tax Cuts and Jobs Act (TCJA) which is effective for 2018 through 2025.

What changed?

Check out our blog, Tax Reform FAQs: Is Home Mortgage Interest Still Deductible?

but, in a nutshell…

Prior to the TCJA, taxpayers could deduct up to $1.1M of home acquisition indebtedness.

For 2018-2025, the new law allows taxpayers to deduct up to $750,000 of qualified residence interest if it qualifies as home acquisition indebtedness.

Examples Illustrating the Impact of the TCJA Changes

Example 1: Dave and Erin have a $1.M mortgage that was used to buy their principal residence in 2015. Dave and Erin borrowed $200,000 of home equity debt to put on an addition on their home in 2018. For 2018-2025, Dave and Erin will be able to deduct the interest on $1M of home mortgage acquisition indebtedness and no deduction will be allowed for the additional $200K of home equity debt.

Example 2: Dave and Erin have a $650,000 mortgage on their principal residence purchased in 2012. They purchase a second residence in 2018 for $500,000 and incur $400,000 of mortgage debt. For 2018, Dave and Erin will be able to deduct mortgage interest on $750,000 of mortgage indebtedness.

Example 3: Dave and Erin borrowed $650,000 in 2012 to purchase their principal residence. In 2018, the take out a home equity line of credit for $75,000 to purchase an automobile. None of the $75,000 home equity debt will be deductible.

Planning Considerations

Taxpayers with low mortgage balances, generally under $400,000, should consider paying them off, if possible, due to the limited benefit from the deductibility of home mortgage interest.

Taxpayers with higher mortgage balances $750,000 to $1,000,000 may wish to pay them off slowly due to the grandfather provisions for mortgages in excess of $750,000.

Taxpayers who maximized the deductibility of home mortgage interest in the past with mortgages of $1,100,000 may wish to pay down their mortgage balance to $1,000,000 to fully utilize the deductibility of mortgage interest.

Questions on the mortgage interest deduction? Contact our Tax Services Team.

For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.