The TAX CUTS AND JOBS ACT OF 2017 really changed the way that people can deduct their mortgage interest on their tax returns.

Prior to that law’s passage, taxpayers could deduct interest on the first $1,000,000 of mortgage debt that was taken out to purchase, build or improve real estate. They could also deduct the interest on the amount of up to $100,000 of home equity debt. Click the orange circle below to listen.

SO HOW DOES THE NEW TAX LAW AFFECT THIS?

It affects this deduction in two ways. First, the $1,000,000 limit was reduced to $750,000 for new mortgages. However, the $1,000,000 was grandfathered in for current loans. Now, not a lot of people have $750,000 mortgages, so for many this will not impact their returns, but the second way really does. That is the interest on home equity debts which has been eliminated. This will affect people who took out home equity lines of credit and they used those for non-home improvement purposes, such as buying a car, consolidating their credit card accounts, taking a vacation, etc. These existing types of loans were not grandfathered in for this purpose.

AM I CORRECT THAT I CAN STILL DEDUCT MORTGAGE INTEREST IN FULL IF I HAVE A $150,000 MORTGAGE AND $50,000 IN HOME EQUITY DEBT THAT I USED TO REMODEL MY HOME?

That is correct. Because your total mortgage debt is under $750,000 and all of it was used to improve your home, that interest would still be deductible.

Now if we change the scenario a little bit: If you were to use $25,000 of that $50,000 home equity loan to remodel your home and $25,000 to buy a new car, only half of that interest would be tax deductible.

You know with tax law it always gets complicated, so even to further complicate things, you can only take these deductions now if you are actually itemizing on your return. Like we talked about in previous episodes, the itemized deduction limit went up. Therefore, you have to have itemized deductions over $12,000 for single or $24,000 for married even to be able to take advantage of any of the mortgage interest deductions.

DOES THIS ALSO AFFECT BUSINESS OR INVESTMENT INTEREST?

No it doesn’t. That is the nice thing. These rules apply only to mortgage interest on your personal residence and vacation homes. Not your businesses. That, for the most part, is still fully deductible.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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