Is my mortgage interest still tax deductible?

Probably, but it depends!

The TCJA made home ownership more expensive, especially in the SF Bay Area where the median home price is north of $1,000,000. This is because the new tax-deductible limit for a mortgage is now $750,000 as opposed to $1,000,000 pre-tax reform, and the overall State and Local Tax Deduction (SALT), which includes real estate taxes, is now capped at $10,000.

So, how does this impact you? Read on to learn more from the most frequently asked questions our client base has sent us.

Q: The current balance on my mortgage is $975,000. Is my mortgage interest still tax deductible?

A: Maybe. Let’s start with the basics. For mortgage interest to be tax deductible, the mortgage must be a secured debt on a qualified home in which you have an ownership interest. To benefit from the mortgage interest deduction, you must itemize deductions on Schedule A (Form 1040). If you meet these criteria, the next step is to review the date the debt was incurred. If your loan was in place before December 16, 2017, your debt limit for deductible mortgage interest is $1,000,000. If your loan was finalized after December 16, 2017, your loan limit is $750,000. There is an exception for loans that commenced between December 16, 2017 and April 1, 2018. A taxpayer who entered into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchased such residence before April 1, 2018, is considered to have incurred the debt prior to December 16, 2017. So, if you were under contract during that time period and the loan was secured on or before April 1, 2018, then your loan limit is $1,000,000. To confirm your loan limit, speak to your tax advisor. 

Q: If my loan is over the $1,000,000 or $750,000 limits, how does that impact me?

A: If your loan exceeds the threshold, your mortgage interest deduction will be limited. If you have a pre-December 16, 2017 loan balance of $1,500,000, the interest paid on the first $1,000,000 is tax deductible and the balance is not. 

Q: I own two homes, my principal residence and a vacation home. The mortgage on my primary residence is $750,000 and the mortgage on my vacation home is $350,000. How much of my mortgage interest is deductible? The debt on both properties was incurred in 2015.

A: You can deduct mortgage interest on loan balances up to $1,000,000. In this scenario, $1,000,000 of the $1,100,000 is deductible. Taxpayers are eligible to deduct mortgage interest of up to $1,000,000 or $750,000 on up to two properties. 

Q: I read that interest paid on a HELOC is not deductible, is that accurate?

A: It depends on how you used the proceeds. If the proceeds were used for personal purposes, i.e., to pay off credit card debt, to go on vacation, to pay for your child’s college education, etc., the interest is not tax deductible. Prior to 2018, interest paid on a HELOC with a balance up to $100,000, regardless of how you used the proceeds, was deductible. The $100,000 HELOC balance was in addition to the $1,000,000 mortgage limit. Post 2018, interest paid on a HELOC is only deductible if the proceeds were used to buy, build, or substantially improve the taxpayer’s home that secures the loan. As under prior law, the loan must be secured by the taxpayer’s main home or second home (qualified residence), not exceed the cost of the home, and meet other requirements. The total loan balance(s) cannot exceed $1,000,000/$750,000. There is no longer an additional $100,000. 

Q: Are my property taxes still tax deductible?

A: Yes, your property taxes are tax deductible. Your state income taxes are also still tax deductible. So, what changed? Prior to 2018, the total amount of state and local taxes paid was deductible. The amounts you paid for state income taxes, property taxes, and personal property taxes (DMV registration fees) were added together and deducted on Schedule A. Post 2018, those same taxes are added together and are deductible, but they are capped at a combined total of $10,000. If you live in the Bay Area and own a house, your state income tax alone is likely over $10,000. So, most likely you will be limited on your state and local tax deduction. This, however, will not impact your tax bill as much as you think it will. Prior to 2018, the Alternative Minimum Tax (AMT) thresholds were low and many taxpayers in the Bay Area were hit with AMT. For example, a married couple earning combined salaries of $250,000 annually were likely in AMT. If you were in AMT, you were not getting a tax benefit for your state and local tax deductions because those deductions were being “added back” via AMT. In 2018, far fewer taxpayers will be subject to AMT. So, while you may have lost some of your state and local tax deductions, you likely also lost your AMT tax and may find yourself in a net neutral position here.  

We hope you found this Q&A helpful.

The rules surrounding the deductibility of mortgage interest can be complex depending on the facts and circumstances. If you have specific questions about your situation, please contact us (preferably before the ink is dry on the loan documents).