Tax Cuts and Jobs Act Reduced Threshold For Qualified Residence Loan Deduction

July 23, 2019

Millions of Americans count on the mortgage interest deduction to reduce their income taxes every year. For some, it’s the reason they itemize.

The Tax Cuts and Jobs Act (TCJA) may have changed your eligibility for this critical deduction. Prior to this new set of tax laws, married couples filing jointly could deduct interest of up to $1 million ($500,000 for married filing separately) on first or second home mortgages, as well as up to an additional $100,000 on home equity loans and lines of credit.

Beginning with the 2018 tax year and continuing through 2025, that upper threshold has been reduced to $750,000 for married filing jointly and $375,000 for married filing separately. This change actually took effect before 2018: The new limits apply to loans secured after December 15, 2017.

Qualified Residence Loans

That’s not all you need to know about the relevant changes in the TCJA. Prior to its passage, you could deduct home equity loan interest even if you used the borrowed money for personal expenses like paying off credit card debt or buying a new car. Now, interest is only eligible if it is charged on funds that were used to purchase, construct, or make substantial improvements to your first or second home. This is referred to as a qualified residence loan or qualified residence interest.

The IRS has strict definitions for qualified residences. If it’s your first home, it can be a house, condominium, mobile home, house trailer – even a boat. But it must have sleeping, cooking, and toilet facilities.

You’re not required to use a second home for it to be considered a qualified residence unless you rent it out. If you do, you have to live in the home for at least 14 days or more than 10 percent of the number of days it’s used as a rental – whichever is longer. Otherwise, the IRS considers it residential rental property, which has a whole different set of tax regulations.

Consult With a Professional

As with all of your income tax issues, it’s preferable to know ahead of time precisely what you can deduct and what you can’t. Making a mistake here means you’ll in the least have to file an amended return. You may even have to pay a penalty. We understand the IRS rules in this area and can advise you on claiming the mortgage interest deduction.

It’s not too early to start planning for 2019 taxes. Contact us to set up a consultation on this topic. We can even handle all of your tax preparation and filing if needed.

Let’s Get Started

Stay up-to-date with our newsletter!