TCJA Mortgage Interest Limitations

The Tax Cuts and Jobs Act of 2018 changed both the type of mortgage interest that can be deducted as well as the amount of interest that can be deducted. 

Acquisition Debt vs. Equity Debt

The first step to untangling these new limitations is to distinguish between acquisition debt and equity debt. 

Acquisition Debt is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and must be secured by the taxpayer’s residence.

Equity Debt is all other debt secured by the taxpayer’s residence, such as home equity proceeds that are used to pay off credit card debt, purchase a vehicle, take a vacation, etc.

Under the TCJA, all equity debt is non-deductible, even if incurred prior to December 15, 2017.  However, if the proceeds from home equity debt is used to buy, build, or substantially improve the property that secures the debt, the debt can be considered acquisition debt.  Acquisition debt is deductible, but different rules apply depending on the date it was incurred.

New Limits

For mortgages acquired after December 15, 2017, taxpayers can write off interest paid on indebtedness of $750,000 or less.  If mortgage indebtedness exceeds $750,000, only a percentage of the interest can be deducted. 

Grandfathered Debt (Mortgages acquired on or before December 15, 2017)

A taxpayer can write off interest paid on mortgages that have an acquisition debtof up to $1 million dollars.  Equity indebtedness is no longer allowed, even if incurred prior to December 15, 2017. 

Refinancing Grandfathered Debt

A taxpayer can retain the grandfathered $1 million interest limitation, even if they refinance after 12/15/17.  However, the refinanced debt can’t exceed the mortgage balance at the time of refinancing, unless the additional amount can be considered acquisition debt and the total indebtedness falls below $1 million. 

Tax Planning Is Important

With these changes come new opportunities when it comes to property acquisition and securing a loan. We can help explain your options so that you can strive for the maximum deductibility when acquiring property or property-related debt. Feel free to give us a call if property or debt acquisition is in your future.