How Does the Mortgage Interest Deduction Work?

The mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on a loan that is secured by their principal residence or secondary residence.

Starting in 2018 the Mortgage Interest Deduction is limited to interest on $750,000 of what’s called “acquisition indebtedness” – a mortgage. This limit continues to be applicable to a principal and/or a secondary residence.

For a married taxpayer filing separately, Mortgage Interest Deduction is limited to interest on $375,000 of a Mortgage.

If you obtained a mortgage before December 15, 2017, the mortgage interest deduction is grandfathered into the prior law and will be limited to the interest on $1,000,000 of your mortgage.

Starting in 2018 there is no longer a deduction available for interest on home equity debt, regardless of when the home equity debt was incurred.

This means that if you obtained a home equity loan on your home in 2017, you cannot take a deduction for the interest paid on the home equity loan starting in 2018. This is a significant change in the law.

With regard to refinancing a mortgage loan, under the new law, if a taxpayer refinances an existing mortgage obtained on or after December 15, 2017 the taxpayer will be subject to the $750,000 limit, or the $375,000 limit if they are married filing separately.

If a taxpayer refinances a mortgage obtained before December 15, 2017, then he or she can still deduct the interest on $1,000,000 of original mortgage, to the extent that the debt resulting from the refinancing does not exceed the original mortgage amount.

So for example, if you obtained a mortgage of $900,000 on December 14, 2017 and now you want to refinance the home in the amount of $1,000,000, then you can only deduct the interest on $900,000 of the refinanced mortgage.

It is important to note that the changes to the tax law related to the Mortgage Interest Deduction last for eight years, through 2025. In 2026, the previous rules will come back into effect, unless they are extended.

Please contact us with questions or comments.