Home Mortgage Interest Deductions – Mortgages Over $750,000
If you own a home, the interest you pay on your home mortgage provides one of the best tax breaks available. However, many taxpayers believe that any interest paid on their home mortgage loan is deductible. Sadly, they're wrong. With home prices skyrocketing in many states, now's a good time to revisit the interest deduction rules for home mortgages and home equity loans.
It used to be the case that pretty much all interest payments were deductible. Since 1986, however, deductibility has become very complicated. Personal interest is disallowed, but one kind of interest that remains deductible is qualified residence interest. Qualified residence interest is interest incurred from buying, building, or improving your qualified residence, or from home equity loans on that residence. You can deduct interest from up to two qualified residences: your primary home and one other vacation home or similar property. You cannot deduct mortgage interest with respect to a third residence.
However, this deal comes with strings attached. You can't deduct the interest for acquisition debt greater than $750,000 ($375,000 for married individuals filing separately) for mortgages acquired on December 15, 2017 or later. Mortgages acquired prior to December 15, 2017, follow the grandfathered limitation of $1 million ($500,000 for married filing separately). So, for example, if you were to buy a $2 million house with a $1.5 million mortgage in 2018, only the interest that you pay on the first $750,000 in debt will be deductible. The rest will be considered personal interest.
Note also that the $750,000 ceiling on deductible home mortgage debt includes both your primary residence and your second home combined. Too many taxpayers assume that they can deduct $750,000 from each mortgage. But if you have a $600,000 mortgage on your primary home and a $400,000 mortgage on your beach house or ski lodge, you'll have to count $250,000 of the total as nondeductible personal interest.
The rules are slightly different for home equity loans. Home equity debt is debt (other than acquisition debt) secured by your principal or second residence. Interest on home equity loans are also subject to the new $750,000 limitation in combination with any home acquisition debt. You must use the funds to "buy, build, or substantially improve" the same property whose equity is the source of the loan in order for the interest to be deductible. This includes remodeling and renovation, building an additional room, installing a new roof, or replacing an HVAC system, but not paying off credit card debt or funding a vacation.
I would be happy to personally go over all of these rules with you to see if the qualified residence interest technique-or other tax-saving strategies that your financial situation may suggest-will work for you.
© 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.
It used to be the case that pretty much all interest payments were deductible. Since 1986, however, deductibility has become very complicated. Personal interest is disallowed, but one kind of interest that remains deductible is qualified residence interest. Qualified residence interest is interest incurred from buying, building, or improving your qualified residence, or from home equity loans on that residence. You can deduct interest from up to two qualified residences: your primary home and one other vacation home or similar property. You cannot deduct mortgage interest with respect to a third residence.
However, this deal comes with strings attached. You can't deduct the interest for acquisition debt greater than $750,000 ($375,000 for married individuals filing separately) for mortgages acquired on December 15, 2017 or later. Mortgages acquired prior to December 15, 2017, follow the grandfathered limitation of $1 million ($500,000 for married filing separately). So, for example, if you were to buy a $2 million house with a $1.5 million mortgage in 2018, only the interest that you pay on the first $750,000 in debt will be deductible. The rest will be considered personal interest.
Note also that the $750,000 ceiling on deductible home mortgage debt includes both your primary residence and your second home combined. Too many taxpayers assume that they can deduct $750,000 from each mortgage. But if you have a $600,000 mortgage on your primary home and a $400,000 mortgage on your beach house or ski lodge, you'll have to count $250,000 of the total as nondeductible personal interest.
The rules are slightly different for home equity loans. Home equity debt is debt (other than acquisition debt) secured by your principal or second residence. Interest on home equity loans are also subject to the new $750,000 limitation in combination with any home acquisition debt. You must use the funds to "buy, build, or substantially improve" the same property whose equity is the source of the loan in order for the interest to be deductible. This includes remodeling and renovation, building an additional room, installing a new roof, or replacing an HVAC system, but not paying off credit card debt or funding a vacation.
I would be happy to personally go over all of these rules with you to see if the qualified residence interest technique-or other tax-saving strategies that your financial situation may suggest-will work for you.
© 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.