Mortgage Interest Benefit Gets New Twists

Traditionally, tax law provides numerous incentives for home ownership by allowing the deduction for mortgage interest and real estate tax. The Tax Cuts and Jobs Act modifies these popular tax benefits.

Mortgage Interest

Home mortgage interest is generally deductible if it is paid or accrued on acquisition indebtedness or home equity indebtedness secured by any qualified residence of the taxpayer (i.e., the taxpayer’s principal or second residence). The deduction for acquisition indebtedness is limited to interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return) and the first $100,000 on home equity loans ($50,000 for a married taxpayer filing a separate return).

Under the Tax Cuts and Jobs Act, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately) for tax years beginning after December 31, 2017, and before January 1, 2026. It is important to note, the reduced amounts for application of the acquisition indebtedness do not apply to any indebtedness incurred on or before December 15, 2017.

These rules adjust again for tax years beginning after December 31, 2025. At that time, a taxpayer may treat up to $1,000,000 ($500,000 in the case of married taxpayers filing separately) of indebtedness as acquisition indebtedness, regardless of when the indebtedness was incurred.

Real Estate Tax

The Tax Cuts and Jobs Act provides that for tax years beginning after December 31, 2017, and beginning before January 1, 2026, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the total amount of

  1. state and local property taxes not paid or accrued in carrying on a trade or business, and

  2. state and local income (or sales taxes in lieu of income taxes) for the tax year.

Foreign real property taxes cannot be deducted under this exception.

In view of these tax changes, (which are only summarized here), be sure to contact your tax professional, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. They’ll be able to best assist you with home ownership as it applies to your overall tax plan.