WSJ – The New Tax Law: The Mortgage-Interest DeductionApril 10, 2018
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