Housing prices have been skyrocketing in many parts of the country. If you buy a home, at least you may qualify for generous mortgage interest deductions, as can many existing homeowners. Despite revised rules imposed by the Tax Cuts and Jobs Act (TCJA) for 2018 through 2025, you can generally continue to write off most, if not all, of the mortgage interest you pay during the year if you are an itemizer.

Background: Prior to the TCJA, you could deduct interest as either acquisition debt or home equity debt, or both, within generous limits.

  • Acquisition debt: This is debt where the mortgage proceeds are used to buy, build or substantially improve the home. Typically, acquisition debt represents the main part of a mortgage interest deduction. To qualify for the write-off, the loan must be secured by a qualified residence (e.g., your principal residence or a second home). The interest was deductible on loans up to $1 million.
  • Home equity debt: When it was permitted by state law, you could deduct the interest on home equity loans secured by a qualified residence, regardless of how the proceeds were used. Deductions were limited to interest paid on the first $100,000 of debt. Plus, the loan amount could not exceed your equity in the home.

However, mortgage interest deductions were subject to the “Pease Rule,” along with certain other itemized deductions. This rule reduced deductions for certain high-income taxpayers.

Latest rules: Beginning in 2018, the TCJA includes three key changes for homeowners.

  1. The threshold for deducting interest paid on acquisition debt is lowered from $1 million to $750,000 for loans originating after December 15, 2017 (or April 1, 2018 if there was a binding contract in place before December 16, 2017).  In other words, existing homeowners are “grandfathered in” under the prior rules for acquisition debt. If you qualify, you can continue to deduct mortgage interest up to the $1 million threshold. Alternatively, you can still benefit under the $750,000 threshold.
  2. The deduction for interest paid on home equity debt is suspended from 2018 through 2025. It does not matter when you acquired the residence. Currently, the deduction is scheduled to return in 2026.
  3. In conjunction with other TCJA changes for itemized deductions, the Pease rule is suspended for 2018 through 2025. It is also scheduled to return in 2026, absent further legislation.

Overall, the TCJA changes do not affect many homeowners, while others are affected only slightly.

Special tax break: If you incur a new home equity loan or line of credit and use the proceeds for significant home improvements, the debt may be treated as an acquisition debt rather than a home equity debt. Reason: The debt is being incurred to “substantially improve” a qualified residence. Thus, you can add this mortgage interest to your deductible total if you itemize deductions

Final words: Maximize mortgage interest deductions available under the prevailing tax rules. When warranted, contact your professional tax advisor for guidance.