Tax Reform

Tax Reform Brings New Limitations to the Home Mortgage Interest Deduction

Tax Reform Brings New Limitations to the Home Mortgage Interest Deduction

One of the biggest impacts that 2017’s Tax Cuts and Jobs Act will have on the American taxpayer is the shift in rules regarding taking an itemized deduction for home mortgage interest. If you’re a homeowner with a mortgage, the deduction on the interest you pay on your mortgage has been considered a given, but for many people that rule will no longer apply.

Homeowner debt’s new treatment under the tax reform act have added an extra layer of complexity to an already complicated system, and the best way is to start out knowing the difference between acquisition debt and home equity debt, and then to move on to compare what’s now in effect to what was previously in effect.

Acquisition Debt vs Equity Debt

Acquisition debt refers to when you borrow money to buy, build or make significant improvements to either a primary home or second home. When you take out this type of debt, it is secured by the home itself. By comparison, home equity debt is different. It is still secured by the borrower’s primary or second home, but it is used for other purposes, such as financing a business or the purchases of a vehicle, or to pay off debts. The advantage of using home equity debt to pay for these types of expenses is that they have always been deductible, where a consumer loan would not be. 

Changes to Acquisition Debt Rules

Where previous tax law permitted taxpayers to deduct the interest on up to $1 million of acquisition debt and up to $100,000 of equity debt as part of their itemized deductions on Schedule A, the 2017 tax reform act lowered the acquisition debt limit to $750,000 and completely eliminated the ability to deduct interest on equity debt. Though people who were already deducting this interest on debts incurred prior to December 16, 2017 will be grandfathered —meaning that the new rules won’t apply to them — the same is not true for those who have been deducting equity debt. They will lose that deduction altogether. 

For those who have purchased or will purchase a home after the cut-off date, any interest on debt that exceeds $750,000 will still be able to be taken as a deduction, but at a prorated amount, and those whose acquisition debt occurred prior to the cut-off date and who want to take out additional loans will only have their new acquisition debt interest deductible up to a certain point: they will need to subtract their current debt from the new $750,000 limit. With housing and improvement costs rising, this change may present homebuyers with unexpected and unpleasant financial challenges, as the mortgage interest deduction has generally been a consideration when people are determining how much they can spend on a home.

Changes to Equity Debt Rules

The new law is an even bigger challenge for those who have previously taken advantage of being able to deduct up to $100,000 in equity debt interest. Many people have counted on the lower mortgage interest rates combined with the equity debt interest deduction to put themselves in a more tax-advantaged position. Though some of these expenses will be able to continue being deducted if they qualify as having been taken out for a deductible purpose, that will not be true for all of them, and many people may potentially face financial burdens as a result.

Changes to Refinancing Rules

In addition to the loss of the interest deduction, the new tax laws will also have a negative impact on those who are looking to refinance existing acquisition debt. Where previously, refinancing a loan would essentially start the clock over for how many years the interest being paid on the loan could be deducted, under the new law, the interest rate deduction on the refinanced loan is limited to the amount of time that had been left on the original loan prior to refinancing. This means that a homeowner who was ten years into their original 30-year loan and then refinances with another 30-year loan will only be able to take the home acquisition interest deduction for 20 years.

The new tax law is not only more complicated for taxpayers, it also takes away a deduction that many people have relied upon in order to afford a variety of purchases. If you are uncertain as to how this change will impact you or need assistance in understanding what you are or are not permitted to take as an itemized deduction, contact a qualified tax professional.

Jon Osborn, EA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].  

share this post
Search for matches...
Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

Steward Financial Services
38 reviews

California

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts