The Tax Cuts and Jobs Act brought reform to the way taxpayers can deduct interest related to two types of loans secured by a home:
- Mortgage debt that is used to buy or improve a home is known as “home acquisition indebtedness.” Under prior law, you could deduct interest on up to $1 million of home acquisition indebtedness ($500,00 for married filing separately). Under new tax law from 2018 to 2025, taxpayers can only deduct interest on up to $750,000 of home acquisition indebtedness ($500,000 for married filing separately).
- Any other loan that is secured by a home is known as “home equity indebtedness”. These loans can pay for home acquisition or improvements or for education, paying down credit cards, etc. Under prior law, taxpayers could deduct interest on up to $100,000 of home equity indebtedness ($50,000 for married filing separately). Under current law, the interest related to any proceeds of the home equity loan used to acquire or improve the home remains deductible (within the limits of total acquisition indebtedness). Otherwise, this deduction has been eliminated for all taxpayers.
These limits will not apply to all taxpayers; there are grandfather provisions. The new law doesn’t affect home acquisition indebtedness of up to $1 million (or $500,000 for married filing separately) that was taken out 1) before December 16, 2017, or 2) under a binding contract that was in effect before December 16, 2017, so long as the home purchase closed before April 1, 2018. If you refinance your loan you may still be grandfathered at these old rates so long as your refinanced balance does not surpass the amount and term of the refinanced indebtedness.