2018 brought with it a variety of tax changes. Among those changes is the mortgage interest deduction limit. The Tax Cuts and Jobs Act (TCJA) changed the rules regarding mortgage interest deductions. But, the act only applies to mortgages originated after December 15, 2017.
How the Mortgage Interest Deduction Limit Works
In 2018, you can now deduct the interest you pay on your first mortgage up to loan amounts of $750,000. If you are married and file separate, you can claim the interest on loan amounts up to $350,000. Prior to this change, you could deduct the interest on the first $1 million in loans or the first $500,000 if you were married filing separately.
The exception to the rule, though, is for those that obtained their mortgage prior to December 15, 2017. They get to grandfather the old rules and still deduct interest on the first $1 million in mortgage loans. This exception is set to end in 2025. This exception also applies to homeowners that refinance their mortgage after December 15, 2017. If you obtained your original purchase mortgage prior to December 15, 2017, the exception still stands.
Another change in 2018 is the elimination of the interest deduction on home equity loans and home equity lines of credit. You can no longer deduct interest on these loans. Prior to 2018, homeowners were able to deduct the interest on the first $100,000 in home equity loans or home equity lines of credit.
The exception to this rule, however, is if you used the home equity loan or line of credit to build or improve your home. If the total amount of both loans doesn’t exceed $750,000, you can still claim the deduction for interest on your second mortgage. If you used the loan for any purpose other than something to do with your home, though, you will not be able to deduct it.
Other Changes to Tax Deductions
There are a few other changes that will affect homeowners when they file their taxes next year. Most notably, is the standard deduction. The new standard deduction is so high that many homeowners won’t even have to worry about the interest they pay because it won’t make sense to itemize their deductions.
The new tax law also affects the amount of property taxes you can deduct on your income taxes. You can now only deduct up to the first $10,000 in property taxes. If you pay more than $10,000, they are not deductible on your taxes. This can greatly impact those living in areas with high property taxes. If you pay less than $10,000 in property taxes, you won’t be affected by this rule, but the standard deduction and mortgage interest deduction limit rules still apply.
It’s important to talk to your tax advisor about your tax situation before you make any changes to your mortgage or buy a new home. Understanding what you can deduct and how it will affect your tax liability is important.