Do I Lose My Mortgage Interest Deduction in 2018?
In a word – no. But there are big changes in the mortgage interest deduction for 2018.
Let’s look at what hasn’t changed. If you borrowed amounts from mortgages you signed before 2018, your mortgage interest deduction does not change for 2018. You can still deduct mortgage interest on mortgage debt up to $1 million. Also, you can deduct the interest on home equity loans up to $100K.
Here’s what’s changed for mortgages signed after 2017. First, you can only deduct interest on the first $750K of mortgage debt. You can still deduct mortgage interest on two residences, but the total of the mortgages cannot exceed the $750K to be able to deduct all of the interest.
What about rental properties? They are not considered residences, and the deductibility of mortgage interest on rental properties has not changed.
Second, interest on home equity loans is no longer deductible. That sounds like really bad news, but it’s not really so bad once we talk about some terminology.
Most people consider home equity loans to be second mortgages or home equity lines of credit. That is the terminology of the mortgage industry. However, that’s not how home equity loans are defined for income tax purposes.
For income tax purposes, a home equity loan is a loan NOT used to buy, build, or improve a residence. If you borrow $50K on a home equity line of credit to improve your home, that is not a home equity loan for income tax purposes. The interest on that loan will be fully deductible if your total mortgage debt, including the new loan, does not exceed $750K.
If, however, you borrow $100K on a second mortgage to buy a Lamborghini, the interest on that loan is not tax deductible.
Third, you can’t refinance a mortgage to cash out equity unless you use the proceeds to improve your home. Of course, you could only do that, under the old law, up to $100K. If you pull cash out of the equity in your residence, the interest on that debt is not tax deductible even if your total mortgage debt is less than $750K.
If you own rental properties, here’s something to think about. Why not borrow against your rentals instead of your residence if you need to use real estate equity to do something other than improve your home?
The changes to the deductibility of mortgage interest are substantial under the new tax law, but they only affect new mortgages. Much of what you’ve read on Facebook is at best merely misleading, and a lot of it is entirely false. If you have questions about your mortgage situation, please contact me at firstname.lastname@example.org or (703) 818-8284.
Thanks for reading!
Frank Stitely, CPA, CVA