WSJ – The New Tax Law: The Mortgage-Interest Deduction

The tax overhaul contains new curbs on deductions for mortgage interest, both indirect and direct.

For 2018, millions fewer filers will benefit from deducting mortgage interest on Schedule A because of the near-doubling of the standard deduction to $24,000 for married couples and $12,000 for singles. Instead, they will opt for the expanded standard deduction.

For example, if a married couple’s mortgage interest, state taxes and charitable contributions average about $15,000 per year, they benefited from listing these deductions on Schedule A in prior years. For 2018 they won’t, because it is to their advantage to take the $24,000 standard deduction instead.

The Tax Policy Center estimates that the number of returns claiming the mortgage-interest deduction for 2018 will drop to 16 million from almost 40 million because of the change.

New limit on eligible mortgage debt: Lawmakers also made important changes for those who do take the mortgage-interest deduction.

The new law allows homeowners with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home. But for new buyers, the $1 million limit fell to $750,000 for a first and second home.

For example, if Charles already has a $750,000 mortgage on a first home and a $200,000 mortgage on a second home, then he can continue to deduct the interest on both on Schedule A.

What if Charles already has one home with a $750,000 mortgage and wants to use a new $200,000 mortgage to buy a second home this year?

In this case, he couldn’t deduct the interest on the second loan, according to a spokesman for the National Association of Realtors, or NAR.

Impact on mortgage refinancing: When it comes to refinancings, the NAR says it believes homeowners can refinance mortgage debt up to $1 million that existed on Dec. 14, 2017, and deduct the interest. But the new loan often can’t exceed the amount of the mortgage being refinanced.

So if Linda has a $1 million mortgage she has paid down to $800,000, then she can refinance up to $800,000 of debt and continue to deduct interest on it. If she refinances for $900,000 and uses $100,000 of cash to upgrade the home, she could also deduct the interest on $900,000, according to the NAR.

But if Linda refinances for $900,000 and simply pockets $100,000 of cash, then she could deduct interest on only $800,000 of the refinancing.

The changes also suspend deductions for interest on home-equity loans through 2025—unless the proceeds of the loan are used to make substantial improvements to the home, and the combined total of the first mortgage and the home-equity line of credit or second mortgage doesn’t exceed $750,000, according to the NAR.

Corrections & Amplifications
In a hypothetical example of a person refinancing an existing mortgage of $800,000 for $900,000, with the additional $100,000 taken as cash, the National Association of Realtors said that the person could deduct interest on only $800,000 of the refinancing. In an earlier version of this article, the NAR incorrectly said that none of the interest on any of the $900,000 refinancing would be deductible. (Feb. 15, 2018)

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By Laura Saunders