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Changes in mortgage interest deduction rules

A lot has been written about the cap on the state and local tax deduction – now $10,000. Another area that will see change for 2018 taxes is the mortgage interest deduction.

With the increased 2018 standard deduction of $24,000 ($12,000 for singles) from $12,700/$6,350 in 2017, some will find they no longer need to bother with a Schedule A itemization schedule. For others in Orange County, a cap on mortgage interest deductions will have an effect.

$750,000 mortgage interest deduction cap for loans originated in 2018

The rules distinguish between existing mortgages, home equity lines of credit and new purchases. Here are a snapshot of the changes:

  • You can deduct interest on up to $1 million of mortgage debt secured by a first or second home if originated before December 15, 2017
  • Home equity loans will only qualify for the interest deduction if they are taken out to substantially improve a first or second home.
  • For property purchases in 2018, the mortgage interest deduction cap is $750,000.

In a recent publication, the IRS gave a number of examples of how these rules would affect a taxpayer.

Here is an interesting scenario: A couple takes out a mortgage for $500,000 in February to purchase a home with a fair market value of $800,000. If they also purchased a vacation home in the mountains, how they choose to finance that purchase could affect their mortgage interest deduction. If a $200,000 mortgage is secured by the vacation home valued at $350,000, it would be deductible. If they took out a home equity loan secured by their main home, it would not.

This illustrates how national tax policy decisions affect real life. It also shows how a decision about financing the purchase of a pied-à-terre or vacation home can be costly mistake at tax time.

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