MORTGAGE INTEREST DEDUCTION
We might love this for you--but only your tax preparer knows for sure! You can reduce your taxable income with the mortgage interest deduction, but it's not as much of an advantage as it used to be. Why, you ask? Read on--and reach out if you have questions about buying DC real estate, or you're ready to begin your search!
WHAT IS THE MORTGAGE INTEREST DEDUCTION?
The home mortgage interest deduction allows mortgagees to reduce taxable income from the prior year by the total interest paid on mortgage debt up to $750k. Cool. But is it still a popular deduction for homeowners?
PROS AND CONS
- The home mortgage interest deduction allows itemizing homeowners to deduct mortgage interest
- The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the maximum mortgage principal eligible for the deductible interest (to $750k from $1M for new loans, effective in 2018 (see below)
- And the TCJA nearly doubled standard deductions--so many taxpayers stopped itemizing
- TCJA also partially eliminated the ability to deduct interest on home equity debt. You can still deduct that interest if it's used to buy, build, or improve your home and doesn't bring your total outstanding mortgage debt above the revised $750k limit, but not if you used the proceeds for other purposes. This change took immediate effect, even on existing home equity loans, with no grandfathering provisions. So it became a serious concern for those itemizing and refinancing.
MORE ON THE 2018 CHANGES
2017 tax reform laws changed eligibility for the mortgage interest deduction, starting in 2018. Homeowners can deduct only the interest on up to $750,000 in mortgage debt, lowered from $1M before tax reform was enacted, though existing mortgages are grandfathered in to $1M unless the property is refinanced. Mortgages higher than the cap still get a deduction, but only on the portion of interest related to the first $750,000.
Home equity debt is also affected under the new law. Previously, homeowners were able to deduct interest on up to $100,000 of home equity debt. The law allowed for unrestricted use of the funds, with the interest still being deductible.
Homeowners can still deduct interest on this type of debt if it’s used to buy, build, or improve a home and doesn’t increase total outstanding mortgage debt above the $750,000 limit, but can’t deduct if funds are used for other purposes. This law took immediate effect, even on existing home equity loans and offered no grandfathering provisions.
What counts as mortgage interest when taking the Mortgage Interest Deduction?
- The portion of your total mortgage payment that goes toward paying interest
- Points paid during the initiation of your mortgage
- Private mortgage insurance
The increase in the standard deduction effectively eliminated the tax benefit of paying home mortgage interest. If the total itemized deductions don’t exceed the raised standard deduction, taxpayers won’t itemize, and the mortgage interest is not deductible.
WHAT THE MORTGAGE INTEREST DEDUCTION ALLOWS
- A mortgage interest deduction allows homeowners to reduce their taxable income by the interest paid on the loan which is secured by their principal residence (or, sometimes, a second home)
- If a home buyer earned $100,000 a year, paid $10,000 the previous year in interest and claimed the mortgage interest deduction, the IRS would tax only $90,000 of the income (not including additional deductions)
- The IRS previously allowed deductions on interest for second homes or on home equity loans of $100,000. or less and for mortgages of $1M dollars or less
- The mortgage interest deduction was beneficial for homeowners within the first five years of their purchase since the majority of the typical conventional mortgage loan monthly payment goes to interest, not principal, during that time.
It is important to discuss possible deductions with your tax advisor or CPA. Tax deductions can change each year and with individuals’ situations, so be sure to consult an expert.
MORTGAGE INTEREST DEDUCTION CALCULATOR
