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Mortgage and Home Equity Interest

Mortgage and Home Equity Interest

According to the IRS, beginning after December 31, 2017 and before January 1, 2026, taxpayers may only deduct interest on $750,000 of qualified residence loans ($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.

Responding to questions received from public and tax professionals, the IRS said that despite newly-enacted restrictions on home mortgages that limits the, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled. The new tax law from after December 31, 107 and before January 1, 2026, the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

New dollar limit on total qualified residence loan balance.

For anyone considering taking out a mortgage, the new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction.

Treatment of debt incurred on or before December 15, 2017

The new lower limit doesn’t apply to any acquisition debt incurred before December 15, 2017.

“Binding contract” exception

An individual who has entered into a binding written contract before December 15, 2017 to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018,  will be considered to incur acquisition debt prior to December 15, 2017.

The following examples provided by the IRS illustrate these points: 

Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000.  In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan would not be deductible.

 

Example 2: In 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.

 

Example 3: In 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 $500,000 loan to purchase a vacation home. The loan is secured by the vacation home.  Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. A percentage of the total interest paid is deductible (see Publication 936).

 

Zaher Fallahi, Tax Attorney, CPA, is a Tax Controversy Attorney, and defends taxpayers in resolving their Income Tax and Offshore Accounts (FBAR and FATCA) problems. Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com

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