Tax Reform: What Happened to My Mortgage Interest Deduction?

In December of 2017, we witnessed the most significant changes to the tax code in a generation get signed into law. If you’re confused about how the changes will affect you, you’re not alone.

Fortunately for most people, the new tax laws should make things simpler. And they very much could lower their total tax burden, too. If you own a home and usually claim the home mortgage interest deduction, here’s how the new tax law may affect you.

You may not need to itemize or claim the mortgage interest deduction

The standard deduction approximately doubled across all filing statuses for 2018. That means millions of people will be better off claiming the standard deduction than itemizing their deductions. That’s true even if they own a home.

That doesn’t mean they’re “losing” the mortgage interest deduction, however. You can think of the deduction as already built into the new, larger standard deduction.

And if your total itemized deductions are greater than the new standard deduction, you can still itemize.

The limits on home mortgage debt have reduced

In many parts of the country, if you own a median-priced home or even an exceptionally nice home, you still don’t need to worry about the limits on home mortgage debt. Under the old law, you could deduct interest on total mortgage debt on your first and second home for up to $1,000,000 ($500,000 if married filing separately). That limit is now $750,000 ($375,000 if married filing separately).

If you live in an expensive metropolis, such as San Francisco or Seattle, a mortgage of more than $750,000 may not be farfetched. Fortunately, the law contains grandfathered clauses for a mortgage you already hold. If you purchased a home before December 15, 2017, and took out a mortgage for more than $750,000 but not more than $1,000,000, you can still deduct the full mortgage interest. (If you were under contract to buy a home by December 15, 2017, and it closed by January 1, 2018, you can still use the old limits, too.)

Home equity loan interest just got more complicated

Prior to 2018, you could deduct interest on up to $100,000 of home equity debt, regardless of how you spent the money. You could take out a home equity line of credit (HELOC), for example, and go on a world cruise and deduct the interest while you paid it all back.

Starting in 2018, you can no longer deduct interest on a home equity loan unless it’s used to buy, build, or significantly improve your home. The loan also must be secured by your home.

There’s no grandfathered rule for this change. If you have a balance on a home equity loan that doesn’t meet qualifications, you can’t deduct interest expense.

“Cash out” refinancing also has new rules

You can’t get around the new HELOC rules by just refinancing your home. If you refinance your home for more than your existing loan amount, you’ll run into the same issue. Unless you use the money to buy, build, or significantly improve your home, you can’t deduct mortgage interest on the portion of the loan that exceeds the one it replaced.

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