Many homeowners have at least one thing to look forward to during tax season: deducting mortgage interest. This includes any interest you pay on a loan secured by your primary residence or second home. This means a mortgage, a second mortgage, a home equity loan or a home equity line of credit, or HELOC.
To qualify for a home mortgage interest tax deduction, homeowners must meet these two requirements:
Beginning in 2018, the limits on qualified residence loans were lowered. This year, couples filing jointly may only deduct interest on up to $750,000 of qualified home loans, down from $1 million in 2017. For married taxpayers filing separate returns, the cap is $375,000; it was previously $500,000.
These limits include any combination of qualified loans, such as mortgages, home equity loans and HELOCs.
For example, if you have a first mortgage that is $300,000 and a home equity loan that’s $200,000, all the interest paid on both of those loans may be deductible since you didn’t exceed the $750,000 cap.
If you took out a mortgage and or home equity loan/HELOC on or before December 15, 2017, you can still deduct the interest on up to $1 million in loans.
The new tax law also ended the deduction for interest on home equity indebtedness until 2026, unless one condition is met: you use HELOCs or home equity loans to pay for home improvements.
In other words, if you didn’t use your home equity loan to fix your roof, add another bedroom or make other upgrades to your residence, then that interest would not be tax deductible.
Remember to keep records of your spending on home improvement projects in case you get audited. You may even need to go back and reconstruct your spending for second mortgages taken out in the years before the tax law was changed.
Most homeowners can deduct all of their mortgage interest. The Tax Cuts and Jobs Act (TCJA), which is in effect from 2018 to 2025, allows homeowners to to deduct interest on home loans up to $750,000. For taxpayers who use married filing separate status, the home acquisition debt limit is $375,000.
For mortgages that were taken out before December 16, 2017, the limits are higher. The same goes for borrowers who were under a binding contract by the December 16th deadline and closed before April 1, 2018. Those borrowers can deduct interest on loans up to $1 million or $500,000 for married, filing separately.
Qualifying mortgages include those used to buy or improve a first or second residence.