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Tax Code Updates may Impact Your Mortgage Interest Deduction

tax codes can change your mortgage interest rates

Unless you're a tax expert, you may not be too enthusiastic about learning how new tax rules will impact deductions you can claim for real estate. However, mortgage interest deductions have historically been a popular benefit for homeowners, so it is a good idea to get familiar with how the Tax Cuts and Jobs Act will impact your 2018 tax return (filed in 2019).

Many homeowners will experience a net benefit from the overall changes made to the tax code; however, tax deductions that impact homeowners will be significantly different from 2018 onward. Here's a quick look at how tax reform will impact homeownership for the foreseeable future.


Mortgage interest deduction only allowed for up to $750,000 of mortgage debt

In the old tax code, you could deduct interest on $1 million of mortgage debt. Starting in 2018, however, you can only deduct interest on mortgage debts of up to $750,000 total for qualified first and second residences. This change only impacts mortgage debt acquired after January 1, 2018, so if you have a million-dollar mortgage, you can still deduct the interest you pay toward that mortgage if it was originated prior to 2018. If you acquire a million-dollar mortgage after January 1, 2018, you'll only be able to claim a deduction for the interest paid towards $750,000 of that debt.


No more deductions for interest paid on 'home equity' debt

Home equity is usually defined as the difference between what you owe your mortgage lender and your property's value. The opportunity to build equity is a significant benefit connected to home ownership. The prior tax code allowed you to deduct interest paid on home equity loans up to $100,000, and you could use those funds at your discretion to pay off debts, fund college accounts, renovate your kitchen, take vacations, etc.

The new law differentiates between "acquisition debt," meaning debt used to buy, build, or significantly improve a home, and "home equity debt" which is used for purposes not related directly to acquiring or improving a property (such as paying for a trip to Hawaii). The Tax Cuts and Jobs Act no longer allows interest paid towards home equity debt to be deducted; however, interest paid towards a mortgage used for acquisition debt can be deducted up to the $750,000 limit.


Higher standard deduction for taxpayers

Another big change coming in 2018 is an increase in standard deductions. The standard deduction for singles increases to $12,000 from $6,350. For couples filing jointly, the deduction increases to $24,000 from $12,700. If you previously itemized your tax return to write off mortgage interest, you may discover that your standard deduction for 2018 is more than what you paid in mortgage interest for the year. In such a circumstance, you would no longer need to itemize your mortgage interest.

If you - or your friends and family - have any questions related to mortgage financing, please don't hesitate to contact me. I appreciate your business, and I'm always eager to provide you with expert guidance as you consider your housing needs and expenses.