Mortgage Interest Deduction For DC Homeowners

Author: Susan Isaacs | The Isaacs Team

One of the perks of ownership. Homeowners can reduce taxable income with the mortgage interest deduction, but it’s not as much of an advantage as it used to be for large mortgage loans.

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. But is it still a relevant deduction for homeowners?

The TCJ Act of 2017

The  Tax Cuts and Jobs Act (TCJA) of 2017 reduced the maximum mortgage principal eligible for the deductible interest, and nearly doubled standard deductions–so many taxpayers stopped itemizing.

TCJA 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 were grandfathered in up 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 Loans (HELOC)

TCJA also partially eliminated the ability to deduct interest on home equity debt. Homeowners can deduct the interest only if it’s used to buy, build, or improve the property and doesn’t bring your total outstanding mortgage debt above the revised $750k limit. This change took immediate effect, even on existing home equity loans, with no grandfathering provisions.

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.

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“Our process was smooth and quick, and they designed a strategy and negotiated a sale well above our asking price; and a purchase price below asking – both in the same market.”

What Counts As Mortgage Interest When Taking The Itemized 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.

Disclaimer

Information provided on this page is intended as a helpful guide and posted for educational purposes only. It is not to be construed as legal, tax or financial planning advice. Citations are not intended as endorsements.

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