Mortgage Interest Deduction: Who Gets It?


In short
  • Millions of additional taxpayers are claiming the expanded standard deduction rather than the list of write-offs, such as the mortgage interest deduction, separately.
  • For new mortgages issued after December 15, 2017, taxpayers can deduct interest on a total of $ 750,000 in debt for a first and second home.
  • Homeowners with existing mortgages on or before December 15, 2017 can deduct interest on a total of $ 1 million in debt for a first and second home.
  • Homeowners can refinance mortgage debt of up to $ 1 million that existed on December 15, 2017 and still deduct interest, but often the new loan cannot exceed the amount of the mortgage being refinanced.
  • Interest deductions for HELOCs are prohibited unless the funds are used for certain types of home renovations.

Less than half of tax filers who deducted mortgage interest in 2017 did so in 2019, in part because the 2017 tax overhaul enacted direct and indirect restrictions on mortgage interest deductions. These changes expire at the end of 2025.

One of the main reasons for this change is that millions of additional tax filers are claiming the expanded standard deduction rather than listing the write-offs separately on Schedule A. For example, if mortgage interest, state taxes, and charitable contributions of a married couple total $ 22,000 in 2020 or 2021, they will not benefit from the breakdown of deductions on Schedule A in the two years. Indeed, their standard deduction is $ 24,800 for 2020 and $ 25,100 for 2021.

In addition, Congress has placed new limits on the amount of mortgage debt on which new buyers can deduct interest.

The result is that about 15 million tax filers likely deducted mortgage interest in 2019 compared to about 34 million in 2017, according to IRS data and an estimate from the Tax Policy Center.

Limits of eligible mortgage debt

Limits apply to taxpayers who accept mortgage interest deductions, although they are more generous for homeowners with older mortgages.

For new mortgages issued after December 15, 2017, taxpayers can deduct interest on a total of $ 750,000 in debt for a first and second home. However, homeowners who have mortgages existing on or before that date can still deduct interest on a total of $ 1 million in debt for a first and second home. These limits are not indexed to inflation.

Here’s an example: John had a $ 750,000 mortgage on a first home and a $ 200,000 mortgage on a second home as of December 15, 2017, so he can continue to deduct interest on both on Schedule A. But if he bought a home with a $ 750,000 Mortgage in 2015, then bought a second home with a $ 200,000 mortgage in 2020, he can’t deduct the interest on the second loan.

Mortgage refinancing

Homeowners can refinance mortgage debt of up to $ 1 million that existed on December 15, 2017 and still deduct interest, but often the new loan cannot exceed the amount of the mortgage being refinanced.

Here is an example provided by Evan Liddiard, a CPA with the National Association of Realtors: If Linda has a $ 1 million mortgage that she has paid off up to $ 800,000, she can refinance up to $ 800,000 in debt and continue. to deduct the interest. If she refinances for $ 900,000 and uses $ 100,000 in cash to make substantial improvements to the home, she could also deduct interest of $ 900,000, according to the NAR.

But if Linda refinances for $ 900,000 and just pockets $ 100,000 in cash, she can deduct the interest on only $ 800,000 of the refinance.

Home Equity Loans and Lines of Credit (HELOC)

The law now prohibits interest deductions for these debts, unless the funds are used for certain types of home renovations. Prior to 2018, homeowners could deduct interest on up to $ 100,000 of debt on the equity in their property used for any purpose.

To be deductible, the loan must now be used to “buy, build or substantially improve” a first or second home. Debt must also be secured by the home to which it applies, so a Heloc on a first home cannot be used to buy or expand a second home.

For more information and a list of eligible improvements, see IRS Publications 936 and 523.

The deadline for individuals this year is May 17th. Want to know more before filing your income tax returns? Sign up for free to download your free copy of the WSJ Tax Guide 2021.

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