New Law Limits the Mortgage Interest Deduction, But You Might Still Come Out Ahead

A big draw for homeownership in the US has been the deduction for mortgage interest. However, the Tax Cuts and Jobs Act passed in December 2017 may make that deduction less important. With the standard deduction nearly doubling to to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing together, fewer people will be itemizing their deductions. And those who still itemize may face limits in how much mortgage interest they can  deduct.

Under the old law, homeowners could deduct interest on loans of up to $1 million to buy a first or second home. They could also deduct up to $100,000 of home equity loans when the proceeds of were used for improvements.

But through 2025, the new law restricts the interest deduction to a maximum balance of $750,000 for couples filing together, or $375,000 for couples filing separately. This limit applies to any new loans after December 14, 2017 and can be for one or two homes. According to IRS interpretation, interest on new or existing home equity loans will still be deductible if the proceeds are used to improve, repair, build or purchase a first or second home.

If the home was purchased before December 14, 2017, the old limits still apply. The old limits also apply to refinances of loans originally taken out before December 14, 2017 as long as the proceeds of the new loan are used to pay off the old loan or to make home improvements.

Under the old law, about 44% of US homes were valuable enough to make it worthwhile for homeowners to itemize their deductions, but according to a study by Zillow, that drops to about 14% under the new law. Still, with the increase to the standard deduction, many people will come out ahead under the new law.

Confused about how the new tax law will affect you? Give our office a call and we’ll help you figure out what changes impact your bottom line!

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