Mortgage Interest Deductibility

Mortgage Deduction

From 2018-2025 the deduction for personal interest paid on Home Equity Loans and Lines of Credit is suspended and disallowed unless the proceeds are to build, buy, or substantially improve the taxpayer’s home that secures the loan. 

For new loans obtained between 2018 and 2025 taxpayers may only deduct interest on $750,000 of qualified residence loans.  The limit is $375,000 for those filing married filing separately.  The limits apply to the combined amount of loans to buy, build or substantially improve the tax payer’s main home and second home. A taxpayer cannot obtain a home equity loan secured by one home to purchase a second home.

Let’s look at three examples that more fully explain the law:

  1. In January 2018 a tax payer takes out a $500k mortgage to purchase a main home worth $800k.  In February 2018, that same tax payer takes out a $259k home equity loan to put an addition on the same home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total of the two loans does not exceed $750k all the interest will be deductible.  If the tax payer uses the proceeds of the home equity loan for other purposes the interest on that will not be deductible.

  2. In January 2018 a tax payer takes out a $500k mortgage to purchase a main home worth $800k.  The loan is secured by the main home.  In February 2018, the tax payer takes out another $250k loan to purchase a vacation home.  This new loan is secured by the vacation home.  Because the total amount of the loans is under $750k all the interest will be deductible.  However, if the second loan was as a result of a home equity loan on the first home, the interest will not be deductible.

  3. In January 2018 a tax payer takes out a $500k mortgage to purchase a main home worth $800k.  The loan is secured by the main home.  In February 2018, the tax payer takes an additional $500k to purchase a second home.  This new loan is secured by the vacation home.  Because the total amount of both mortgages is over $750k not all the interest paid on the mortgages will be deductible. A percentage is deductible.

There are other nuances to the law in this area and can be discussed on a case by case basis.  This limitation on deductions is particularly costly for those who live in areas with high real estate costs, such as Washington, DC and New York City as well as other areas in the United States.

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