For years now, taxpayers have had the opportunity to deduct their primary home and second home mortgage interest from their taxes as an itemized deduction. This mortgage interest deduction had an upper limit of $1 million of acquisition debt and $100,000 of equity debt. How has the 2018 tax bill changed things?
Up Until Now
Acquisition debt is debt that you incurred as a result of purchasing, constructing or renovating your first or second home. The first loan that you took out on your home was acquisition debt (making the purchase) and any additional renovations or remodels were also acquisition debt. Equity debt deductions enabled homeowners to use the equity in their homes for any purpose and take a deduction on the interest of any equity debt.
2018 Tax Law Changes
For 2018-2025, the maximum home acquisition debt deduction has been lowered from $1 million to $750,000 (or $375,000 for married couples filing separately). The new lower limit will not be applied to any debts that were secured before December 15, 2017. That means that as long as your acquisition debt was acquired before that date, you will still benefit from the $1 million cap instead of the new lower limit.
Equity debt has been removed from the tax law, so interest paid on equity debt will not be allowed as a deduction. If you choose to refinance your acquisition debt after December 31, 2017 and roll the related loan costs into the refinanced mortgage, the loan costs will be treated as equity debt. As a result, all mortgage interest related to loan costs will not be deductible.
Will This Affect You?
These tax changes are going to have a significant impact on any homeowners who use their homes as a way to finance personal expenses and benefit on their taxes. If you are considering refinancing your mortgage in 2018, you should contact Miles Tax Advisory beforehand to evaluate the impact of the refinancing on your mortgage interest deduction and overall income taxes. Schedule a meeting today!