THREE IMPORTANT TAKEAWAYS ON MORTGAGE INTEREST FROM THE GOP TAX ACT

The “Tax Cuts and Jobs Act” changed the rules for deducting mortgage interest.  Here are three important “take-aways” from the new rules.  I have discussed these take-aways in past posts here at TWTP - but they bear repeating.

(1) Home equity interest is no longer deductible. 

Home equity interest is interest on loans secured by a residence whose proceeds are NOT used to “buy, build or substantially improve” the property secured.  This includes both existing and new borrowings.  There is no “grandfathering” of existing home equity loan interest.

If you have refinanced your home or taken out a home equity loan or opened a home equity line of credit, or plan to do any of these in the future, to get money to pay down credit card debt, pay for your children’s college, buy a car, pay medical bills, etc., or increased your principal in refinancing to cover the closing costs of the new loan, the interest on this borrowing is NOT deductible if you itemize on Schedule A.

(2) Home equity debt is defined by the use of the money borrowed and not what the lender calls the loan. 

If you take out what the lender calls a “home equity loan” or open what the lender calls a “home equity line of credit” and use the money from the loan to pay for capital improvements to “substantially improve” your home this is acquisition debt and the interest is fully deductible on Schedule A, up to the statutory principal limits.

(3) Homeowners MUST keep separate track of acquisition debt and home equity debt.

This has always been important because of the previous $100,000 principal limit on the home equity interest deduction.  But now it is vital.  You must go back to your initial purchase mortgage and track all subsequent refinancing and new mortgage loans.

It is the responsibility of the taxpayer, and NOT your tax professional, to keep track of mortgage borrowing.  However, you certainly can ask, and pay, your tax professional to do this.  The time to ask is NOW – not during the tax filing season.

A bonus item.  In order for a loan to qualify for the mortgage interest deduction, these three conditions must be met –

* The home being bought, built or substantially improved must be used as the security for the loan.

* If the homeowner defaults on the loan the home will be taken to “satisfy” the debt.

* The loan must be recorded with the appropriate agency under state law.

This is not new.  It has been the law since the Tax Reform Act of 1986.  A mortgage loan with a bank or commercial lender will generally meet all of these requirements.  But it is very important that private mortgage loans, including those resulting from installment sales where the seller “takes back” the mortgage, be recorded with the appropriate government agency, usually the county recorder's office, in order to be able to deduct the interest paid.

Of course, these take-aways are only important if you are still able to itemize.  The combination of the increased Standard Deduction and the loss and limitation of allowable deductions will mean that many taxpayers who had consistently itemized in the past will no longer be able to do so. 

I discuss the new mortgage interest deduction in more detail in my book “The GOP Tax Act and the New 1040” and my “Mortgage Interest Guide”.  The Mortgage Interest Guide includes worksheets, with an example, you can use to track your mortgage debt.   

TTFN