On December 22, 2017, the President signed sweeping tax legislation that changed many things.  Over the course of this tax season, some of the most common questions revolved around changes to the mortgage interest deduction rules.

Beginning in 2018 through 2025, the new rules for the mortgage interest deduction are:

1. New mortgage indebtedness is limited to $750,000 for the full interest expense deduction. For any loans originated prior to 2018, we are still allowed to use the old limit of $1.1 million of indebtedness. 

This new $750,000 limit is the total allowed for both your first and second home mortgages combined. As long as the total of your mortgage balances aren’t over this limit, you won’t have to limit the interest deduction. If your total is over this limit, you will have to do a calculation to pro-rate how much of the total interest paid is deductible.

Also, to count as mortgage indebtedness, the loan must have been used to buy, build or improve the home that is the collateral for that loan. Meaning, you can-not get a loan against your primary home and use that money to buy your winter home in Arizona or a new boat, for example, and deduct the interest expense.

Take caution if you decide to refinance a loan that qualified under the “old rules”.  As long as you don’t extend the terms of the loan, or get money back, you can stay grandfathered with the old rules.  If you extend the term of the loan (i.e., your previous mortgage had 23 years left on it, and you now have a new 30 year mortgage), or get any money back, you now are subject to the new rules instead of the old.

2. Home equity lines of credit (HELOC) interest expense is now suspended through 2025.

Under the old law, up to an additional $100,000 of indebtedness interest expense was allowed.

There are two exceptions to this suspension: First, if you borrow on a home equity line of credit and use that money for business, you can still make an election to deduct that interest.

Second if you use a home equity line secured by your primary residence to remodel or improve your primary residence, it is considered mortgage interest and is still deductible under the new rules as long as you don’t go over the new indebtedness limit.

Now for a couple of Q&A items to help clarify some of the most common questions:

Q:  Can I still deduct the mortgage interest I have related to my rental house?

A: Yes, as long as the debt was spent to acquire or improve the rental.

Q:  I borrowed against my primary home to purchase my rental home.  Is that still deductible?

A:  Generally, no, because the collateral was your primary home, not your rental home.  However, there is an election that can be made to ensure deductibility.

Q:  I borrowed against my primary home to purchase a winter home.  Is this still deductible?

A:  No.  Because the winter home is not the collateral for the loan, it is not deductible.

Q:  I have a HELOC that is now not deductible under the new law.  If I refinance my first mortgage on my primary residence and use the extra funds to pay off the HELOC to make the interest now deductible again, is that ok?

A:  No.  If the monies from the HELOC were not used for buying or improving your home originally, rolling them into your first mortgage won’t make them deductible.

Q:  My house is paid off, but I have a HELOC for emergencies and other reasons.  If I borrow on that to remodel my kitchen, does that mean it isn’t deductible since HELOC’s are no longer deductible, generally?

A:  No.  The interest in this case would be deductible because the funds were used to improve your primary residence.

As you can see, this can get very complicated and confusing.  Call your KTLLP tax professional today if you have questions about how this may affect your return in the future.