In brief
- Millions more taxpayers are claiming the expanded standard deduction rather than listing write-offs, like the mortgage-interest deduction, separately.
- For new mortgages issued after Dec. 15, 2017, taxpayers can deduct interest on a total of $750,000 of debt for a first and second home.
- Homeowners with existing mortgages on or before Dec. 15, 2017 can deduct interest on a total of $1 million of debt for a first and second home.
- Homeowners can refinance mortgage debt up to $1 million that existed on Dec. 15, 2017 and still deduct the interest—but often the new loan can’t exceed the amount of the mortgage being refinanced.
- Interest deductions for HELOCs are prohibited unless the funds are used for certain types of home improvement.
Less than half of filers who took deductions for mortgage interest in 2017 did so in 2019, in part because the 2017 tax overhaul enacted both direct and indirect curbs on deductions for mortgage interest. These changes expire at the end of 2025.
A big reason for the change is that millions more filers are claiming the expanded standard deduction rather than listing write-offs separately on Schedule A. For example, if a married couple’s mortgage interest, state taxes and charitable contributions total $22,000 in 2020 or 2021, they won’t benefit from itemizing deductions on Schedule A in either year. That’s because their standard deduction is $24,800 for 2020 and $25,100 for 2021.
In addition, Congress imposed new limits on the amount of mortgage debt that new purchasers can deduct interest on.
The upshot is that about 15 million filers likely deducted home mortgage interest in 2019 vs. about 34 million in 2017, according to IRS data and an estimate from the Tax Policy Center.
Limits on eligible mortgage debt
Limits apply for taxpayers who do take mortgage-interest deductions, although they are more generous for homeowners with older mortgages.
For new mortgages issued after Dec. 15, 2017, taxpayers can deduct interest on a total of $750,000 of debt for a first and second home. However, homeowners with existing mortgages on or before that date can still deduct interest on a total of $1 million of debt for a first and second home. These limits aren’t indexed for 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 the interest on both on Schedule A. But if he bought one home with a $750,000 mortgage in 2015 and 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 up to $1 million that existed on Dec. 15, 2017 and still deduct the interest—but often the new loan can’t exceed the amount of the mortgage being refinanced.
Here’s an example provided by Evan Liddiard, a CPA with the National Association of Realtors: If Linda has a $1 million mortgage she has paid down to $800,000, then she can refinance up to $800,000 of debt and continue to deduct interest on it. If she refinances for $900,000 and uses $100,000 of cash to make substantial improvements to the home, she could also deduct the interest on $900,000, according to the NAR.
But if Linda refinances for $900,000 and simply pockets $100,000 of cash, then she can deduct interest on only $800,000 of the refinancing.
Home-equity loans and lines of credit (HELOCs)
The law now prohibits interest deductions for such debt unless the funds are used for certain types of home improvement. Before 2018, homeowners could deduct the interest on up to $100,000 of home-equity debt used for any purpose.
To be deductible, the borrowing must now be used to “buy, build, or substantially improve” a first or second home. The debt must also be secured by the home it applies to, so a Heloc on a first home can’t be used to buy or expand a second home.
For more information and a list of improvements that are eligible, see IRS Publications 936 and 523.
This year’s tax deadline for individuals is May 17. Interested in knowing more before you file your taxes? Register for free to download your complimentary copy of the WSJ Tax Guide 2021.
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