Under the Tax Cuts and Jobs Act, the federal government has restricted the availability of the home mortgage interest deduction, which formerly was claimed by many homeowners. The deduction applies to interest payments on a home mortgage or on a loan used to build or improve a primary or secondary home. Now, the deduction is available only to homeowners who itemize their deductions, which may not be a smart decision under the Tax Cuts and Jobs Act. You will need to calculate your total itemized deductions for the year and determine whether they exceed the standard deduction. If they do not, you should simply use the standard deduction. Since the Tax Cuts and Jobs Act dramatically increased the standard deduction in 2018, that deduction usually will offer a greater benefit than itemizing deductions.
Requirements for Using the Home Mortgage Interest Deduction
You must own the home for which you are deducting the interest on the loan. In other words, you must be named on the deed of the home, or you must have a written agreement establishing your ownership interest in the home. If you are claiming the deduction for mortgage interest payments for a second home that you rent to others for part of the year, you must use this home for more than 14 days during the year or for more than 10 percent of the days that you rent the home to others, whichever period is longer. This rule is meant to prevent homeowners from claiming the mortgage interest deduction for rental property instead of a real home.
If you purchased your home before December 15, 2017, you can deduct payments on the interest for up to $1 million of your mortgage debt. If you purchased your home after that date, you can deduct payments on the interest for up to $750,000 of your mortgage debt. The $750,000 reduction is scheduled to expire in 2025.
If you take out a home equity loan to purchase, build, or improve your primary or secondary home, the interest on that loan will qualify for a deduction. (Before the Tax Cuts and Jobs Act, homeowners could deduct interest on a home equity loan taken out for any purpose.) You must use your primary or secondary home to secure the loan, and you cannot take out more in loans than the cost of the home. The value of the home equity loan counts toward the overall $750,000 or $1 million limit for mortgages. Thus, if the home equity loan and any existing mortgage combine to exceed the limit, interest on the amount beyond the limit will not be deductible.
Reduction for Spouses Filing Separate Returns
If your spouse and you file your tax returns separately, each of you can deduct the interest for up to $500,000 of your mortgage debt for a home purchased before December 15, 2017. Each of you can deduct the interest for up to $375,000 of your mortgage debt for a home purchased after December 15, 2017. The reason for halving this deduction is that spouses who own a house together otherwise could double the deduction by filing their taxes separately. Halving the deduction thus ensures that a couple will receive the same result, regardless of whether they file separately or jointly. (This assumes that both of their names are on the mortgage. If only one spouse’s name is on the mortgage, the other spouse will not be able to claim any deduction if they file separately, and the spouse with their name on the mortgage still will get only half of the deduction, leaving the spouses worse off than if they filed jointly.)
If two co-owners of a home are unmarried, the halved deduction does not apply. Since the co-owners will be required to file separately, each of them can claim the full deduction.