How has the Tax Cuts and Jobs Act affected the mortgage interest deduction?
The Tax Cuts and Jobs Act has made several changes to the rules and limitations regarding this deduction.
Beginning in taxable years after December 31, 2018, and before January 1, 2026, taxpayers may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home. As under prior law, the loan must not exceed the cost of the home and meet other requirements.
Note: For interest paid on home equity loans and lines of credit to be deductible, the loan must be used to buy, build or substantially improve the taxpayer’s home that secures the loan.
January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible. For more examples, please refer to IR-2018-32.