Abstract: The interest that homeowners pay on their home mortgages
may provide a tax break in the form of the mortgage interest deduction.
However, a taxpayer must itemize deductions on his or her tax return and follow
a few other rules. This article provides some details.
Home’s where a tax break might be
If you own a home, the interest you pay on
your home mortgage may provide a tax break in the form of the mortgage interest
deduction. However, you must itemize deductions on your tax return and follow a
few other rules.
Acquisition
debt
A personal interest deduction generally isn’t
allowed, but one type of interest that is
deductible is interest on mortgage “acquisition debt.” This means debt that’s:
1) secured by your principal home and/or a second home, and 2) incurred in
acquiring, constructing or substantially improving the home. You can deduct
interest on acquisition debt on up to two qualified residences: your primary
home and one vacation home or similar property.
The deduction for acquisition debt comes with
a stipulation. 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 $750,000 of the total debt is
deductible. The rest is nondeductible personal interest.
Higher limits
on the way
Beginning in 2026, you’ll be able to deduct
the interest for acquisition debt up to $1 million
($500,000 for married filing separately), barring any further legislative
changes.
The higher $1 million limit also applies to
acquisition debt incurred before December 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
home, 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 home 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, 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 interest on a home equity loan unless you use the loan proceeds to buy, build or substantially improve your main home or second home. Other requirements apply. Interest on the home equity loans that are used to pay personal living expenses, such as credit card debts, is not deductible.
More
information
Your home is valuable in many ways. Contact us
with questions or if you’d like more information about the mortgage interest
deduction.