Changes to Mortgage Interest deduction for 2018

During the 2018 tax season one of the most common questions I got from clients had to do with  whether they will lose their mortgage interest deduction in 2018.  Many of them had heard incorrect information about what is changing and not changing in the new law.

So, what does the new law change?   For rental properties mortgage interest was and still is deductible as a rental expense.  Nothing really changed there.  For personal residences there were some changes.  Tax law defines two types of deductible interest for personal residences, acquisition indebtedness and equity indebtedness.  Under the old law, you could deduct interest on up to 1 million dollars to buy or improve up to two personal residences. (Acquisition Indebtedness)  You could also deduct interest on up to 100,000 borrowed against the equity in your residence. (Equity Indebtedness)

Under the new law, the limit for acquisition indebtedness does not change on any existing mortgage, but for new mortgages the limit for acquisition indebtedness has dropped to 750,000.  As under the old law, you can still deduct interest on up to two personal residences as long as the total acquisition debt for the two does not exceed the 750,000 limit.

Equity interest, on the other hand, is no longer deductible. It’s important to remember that what determines whether a mortgage loan is deductible under the new law is how the funds were spent and not the title of the loan.  For example: let’s say that you have a 500,000 balance on your mortgage and then you take out an equity line of credit and borrow an additional 30,000.  Let’s say you spend the 30,000 to remodel your home.  In that case the 30,000 spent would qualify as acquisition indebtedness and would be fully deductible.  If you then borrow another 30,000 on that same line of credit and take a vacation with the funds, the interest on that 30,000 is not deductible under the new law.

If you are confused about any provisions in this new law, we would be happy to answer your questions regarding how it will impact your individual situation.