Emails and voice mails from worried clients have continued unabated, so we thought it would be a good idea to follow up on our earlier post on home mortgage and home equity interest deductions under the new Tax Cuts and Jobs Act of 2017. Two important takeaways are 1) home equity interest on primary residences can still be deductible, and 2) rental property mortgage interest deductions are unaffected by the new tax law.
Home Equity Interest
Yes, both before the Tax Cuts and Jobs Act of 2017 and afterwards, the interest paid on home equity lines of credit on your primary home is deductible, with some limitations starting with tax year 2018.
Before tax year 2018 the regulations [IRC Secs. 163(h)(B) and 163(h)(C)(ii), respectively] state that interest for the qualified residence of a taxpayer is deductible up to $1,000,000 in aggregate acquisition (original purchase, married filing jointly) debt and $100,000 in general home equity indebtedness. Home equity indebtedness not for general purposes (but for actual home improvement) is instead subject to the $1M aggregate limit, not the $100K limit.
Starting with tax year 2018, the regulations [IRC Sec. 163(h)(F)] state that interest for the qualified residence of a taxpayer is deductible only up to $750,000 in aggregate acquisition (original purchase, married filing jointly) debt. The general home equity indebtedness interest deduction has been eliminated. However, home equity indebtedness not for general purposes, but for actual home improvement, is subject instead to the $750,000 aggregate limit and is not eliminated.
The bottom line is if your home equity line was used to pay for home improvement and not for things like rolling over credit card debt or buying automobiles, you're fine as long as aggregate home debt does not exceed $750,000. If it does exceed that amount, you can still deduct all the interest associated with your balance up to $750K; just not beyond it.
Still confused? Please do not hesitate to email us at inquiry@njcpaccounting.
Rental Property Interest
The change to the home mortgage interest deductions under the TCJA do not impact the rental property interest deduction for those of you who are renting former homes instead of selling them outright or who own homes for investment purposes. Rental property interest is still fully deductible on Schedule E of your personal return.
There is a cap on interest deductions [IRC Sec. 163(j)] for large businesses [over $25,000,000 in revenues per IRC Sec. 448(c)], so if this affects you, feel free to contact us at firstname.lastname@example.org for further details.