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Is My Mortgage Interest Deductible in 2018?

| January 18, 2018
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Information and misinformation over the tax bill is maddening. 

I have spent the last 2 hours researching the topic of how mortgage interest will be taxed under the new tax bill.  I still can’t get a completely straight answer.

The first step to determining the impact of the tax law is to determine whether or not you will be itemizing your taxes any more.  Many people will no longer itemize due to restrictions on the state and local tax deductions and the increased $24,000 standard deduction (for couples). 

No Deduction – No Brainer!  If you will no longer be itemizing, then clearly ANY mortgage interest – for YOU – is not deductible, so there is no sense thinking any further about the topic.  That makes prepaying a mortgage much more attractive for many individuals.  Whereas in the past you might consider that a 3.75% mortgage was actually (after adjusting for tax savings) costing you 2.70% - that is no longer the case.  That means prepaying your mortgage is equivalent to earning 3.75% TAX FREE GUARANTEED on your money.  There are NO guaranteed fixed income investments currently paying that kind of interest rate.  So, if you are not getting tax benefit, give serious thought to devoting more resources to paying down that debt early!

Is My Interest Deductible?  Depends Who You Ask!  If you are itemizing, however, the rules are now different.   It appears at first that the law excludes interest on Home Equity Lines of credit, allowing a deduction only for first mortgages, to a cap of $750,000.  However, according to Fox Business – the prohibition on Home Equity Loans only applies to new loans taken out since 2017.  That would mean you would be able to continue to deduct interest on your existing home equity loan.  Not so according to Marketplace.org, which informs us that there is absolutely NO grandfathering of home equity loan interest. 

Making things more muddy, according to Loansafe.com and financial industry blogger Michael Kitces (https://www.kitces.com/?s=home+equity) Home Equity loan interest MAY still be tax deductible – IF the proceeds are used primarily to acquire or improve your home.  Most other sources indicate that second mortgages and HELOCS are simply not deductible – period.  Kitces goes even further and suggests that the law implies that even a first mortgage may not be deductible under the new law if it is primarily a “cash out” loan in which proceeds are used for college, debt consolidation, etc. 

So, what is the truth?  It appears that your home equity loan (previous or new) interest is NOT deductible if proceeds were not used to buy or improve the home.  Interest MAY be deductible if proceeds did go into the home – but I would recommend you get the advice of a good accountant on that one.   Your existing first mortgage is probably safe, but before you do a new cash out mortgage you might want to check with a tax professional.  Of course, there is some question as to how the IRS can even know what loan proceeds are used for, and how they could enforce these provisions!  My suspicion would be that the IRS will be skeptical of all home equity loan deductions, so if you are going to try to justify such loans as used for home improvement, make sure you have done your homework on the law (clearly, we can’t believe everything we read in the press!), worked with a tax professional, and have your documentation (receipts etc.) available.  

As for vacation homes, if you are planning to buy a vacation home with a mortgage – don’t count on any deduction for interest.  The government will no longer be subsidizing purchase of vacation homes by the seashore (which seems fair enough!)   Interest on your existing vacation home loan will still likely be deductible.    

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