Deducting home loan interest is trickier under new tax rules

The rules for deducting mortgage interest from home loans have just become more complicated under the Tax Cuts and Jobs Act (TCJA).

The new rules generally limit the deductibility of mortgage interest of up to $ 750,000 in debt to purchase a home. In some cases, the new rules also do not allow deducting interest on loans on the value of the home used in many regular transactions.

If you have an existing mortgage purchased last year or earlier, don’t be alarmed. These new limits do not affect up to $ 1 million in home acquisition debt contracted before December 16, 2017 or incurred to purchase a residence under a contract if the transaction was closed before April 1, 2018. Many homeowners with mortgages and existing home value loans will not be affected because of this grandfather’s rule.

But if you are looking for a home loan, buy a new home or refinance an existing mortgageyou need to know how these new rules may affect you.

Let’s take a closer look at some examples.

A new limit on deductions

First, homebuyers need to understand that mortgage interest deductions are now limited to $ 750,000 home purchase debt. This can increase the costs of buying homes in expensive housing markets where house prices exceed this number.

It is interesting to note that the $ 750,000 limit applies to both single taxpayers and married couples. According to a previous ruling by the Ninth Circuit Court of Appeals, when two single people buy a home together, they can combine their limits and deduct mortgage interest from the debt of up to $ 1.5 million.

If you take out a home loan and do not use the proceeds exclusively for the purchase or improvement of your home, such as spending money on buying a car or paying off credit card debt, then home interest the capital loan is not deductible.

But if the home equity loan was used to renovate or improve your home, then interest is deductible, provided that when combined with your current mortgage, the debt does not exceed the total loan limits of $ 750,000 per second. the new rules.

Loan limits on home value

This can raise questions for homeowners who are now considering a home equity loan.

Take a homeowner with a current $ 800,000 mortgage that was taken out a few years ago. The homeowner wants to take out a $ 100,000 loan this year to improve his home. Would both mortgage and loan interest be deductible?

The $ 800,000 mortgage interest would still qualify because it complies with the old rules, which allows interest deduction for a mortgage of up to $ 1 million.

But because the home loan would be contracted in 2018, when the TCJA limits the deductions to $ 750,000 of the total acquisition debt, none of the interest on the new home loan is deductible.

If the homeowner’s current mortgage is $ 650,000 and in 2018 he takes out a $ 100,000 loan to remodel his home, all interest on both loans should be deductible because the combined loans fall below the $ 750,000 limit.

Holiday homes

The IRS prohibits the deduction of interest on social capital loans taken out in a primary residence if it is used to purchase a vacation home. This is because this new loan is not secured by the vacation home. Instead, the best way to finance a vacation home is to use a secured mortgage for that second home, not through a loan on your primary residence.

Homeowners who refinance a mortgage will also need to consider how the new rules affect them. The TCJA includes a second grandfather rule to refinance up to $ 1 million in home acquisition debt that was contracted before December 16, 2017.

Secured mortgage refinancing

When refinancing a secured mortgage, the mortgage interest remains deductible only if the principal balance of the new loan does not exceed the principal balance of the old loan.

Take a homeowner with a mortgage that was taken out last year for $ 1 million, but now has a balance of $ 950,000. Refinancing mortgage interest should be deductible as long as the balance of the new mortgage loan does not exceed $ 950,000.

But suppose in this example, the current balance of the mortgage is $ 300,000, and you want to replace that mortgage with a new loan with a balance of $ 400,000, in what is commonly called cash refinancing. In this example, only interest attributed to $ 300,000 of the new refinanced mortgage will qualify as deductible mortgage interest. Interest on additional debt cannot be deducted.