Own Your Home?
If you own, the interest you pay on your mortgage may provide a tax break. However, many people believe that any interest paid on their home mortgage loans and home equity loans is deductible. Unfortunately, that’s not true.
Remember, you must itemize deductions in order to take advantage of the mortgage interest deduction.
Deduction and limits for “acquisition debt”
A personal interest deduction generally isn’t allowed. But one kind of interest that is deductible is interest on mortgage “acquisition debt.”
This means debt that’s:
- Secured by your principal home and/or a second home, and
- Incurred in acquiring, constructing or substantially improving the house. You can deduct interest on acquisition debt on up to two qualified residences. Your primary and one vacation residence or similar property.
There is a stipulation for the deduction of acquisition debt. From 2018 through 2025, you can’t deduct the interest for acquisition debt greater than $750,000. $375,000 for married filing separately taxpayers. So if you buy a $2 million house with a $1.5 million mortgage, only the interest you pay on the first $750,000 in debt is deductible. The rest is nondeductible personal interest.
Higher limit before 2018 and after 2025
Beginning in 2026, you’ll be able to deduct the interest for acquisition debt up to $1 million. $500,000 for married filing separately. This was the limit that applied before 2018.
The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017. And to debt arising from the refinancing of pre-December 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-December 15, 2017 acquisition debt. And that refinanced debt amount won’t be subject to the $750,000 limitation.
The limit on home mortgage debt for which interest is deductible includes both your primary residence and your second residence, combined. Some taxpayers believe they can deduct the interest on $750,000 for each mortgage. But if you have a $700,000 mortgage on your primary residence and a $500,000 mortgage on your vacation place, the interest on $450,000 of the total debt will be nondeductible personal interest.
“Home equity loan” interest
“Home equity debt,”as specially defined for purposes of the mortgage interest deduction. This means debt that: is secured by the taxpayer’s home, and isn’t “acquisition indebtedness.” Meaning it wasn’t incurred to acquire, construct or substantially improve the home. From 2018 through 2025, there’s no deduction for home equity debt interest. Note that interest may be deductible on a “home equity loan,” or a “home equity line of credit.” If that loan fits the tax law’s definition of “acquisition debt” because the proceeds are used to substantially improve or construct the home.
Home equity interest after 2025
Beginning with 2026, home equity debt up to certain limits will be deductible (as it was before 2018). The interest on a home equity loan will generally be deductible regardless of how you use the loan proceeds.
Thus, taxpayers considering taking out a equity loan — one that’s not incurred to acquire, construct or substantially improve the home — should be aware that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt will currently lose the interest deduction for interest on that debt.
Contact us with questions at 216.831.7171 if you would like more information about the mortgage interest deduction.