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Taking out a home mortgage or refinancing a currently existing mortgage? If so, you need to know the tax rules for deducting interest.
- You can deduct mortgage interest on Schedule A of your 1040 if you itemize
- Interest can be deducted on up to $750,000 of total home acquisition debt — indebtedness that is secured by your primary home and/or a single secondary home and that is incurred to buy, construct or substantially improve the residence
- Loans incurred before December 16, 2017, have a $1,000,000 indebtedness cap for interest deductions
- Refinancing of pre-December 16, 2017, debt, up to the old loan amount, also has a $1,000,000 indebtedness cap for interest deductions
The treatment of interest that you pay on home equity loans is tricky.
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You can deduct this interest if the loan is secured by a first or second residence and used to buy, build or substantially improve a home. That’s part of the $750,000 (or $1,000,000) acquisition debt. Improvements are substantial if they add value to the home, extend the residence's useful life or create new uses for the home. Additions and renovations count. Basic repairs and maintenance don't.
You can’t deduct interest if you use the home equity loan proceeds for purposes other than to buy, build or substantially improve the home. Before 2018, you could use cash from these loans to buy a car, pay off credit card debt, take a trip and the like, and deduct interest on up to $100,000 of debt. But, the 2017 tax law temporarily ended this tax advantage for home equity loans.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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